By: Special Guest Blogger
We love a smart chick who knows her stuff. That’s why we asked Kelly Erb from TaxGirl.com to share her wisdom to help us save money come April 15.
We know how your tax planning generally works. You start sorting through your receipts some time in early spring in anticipation of giving them to your accountant or punching them into your tax prep software and it hits you: You might owe a lot of money this year. Then you start thinking about the woulda, coulda, shoulda scenarios. And you promise to do better next year. But that’s not when you should be thinking about your taxes. Start thinking now — when you can actually do something about it. Here’s a few suggestions (also called a swift kick to the rear) to get you started:
1. Put money in your IRA. OK, this is assuming that you have an IRA (individual retirement account). If you don’t, get one. Why? You get tax savings now plus you’ve put something away for a rainy day. Deductions to IRAs are deductible “above the line.” That means you don’t even have to itemize to get the deduction. So whatever you put into your IRA now can be deducted from your 2009 gross income without any extra paperwork. Even better? You have until April 15 of 2010 to make a contribution and have it still count for 2009. If you give up one latte a week from now until then, you can put away more than $150.
2. Give stuff to charity. Admit it. You’ve made unfortunate wardrobe choices at some point in your life (high-waisted jeans, really?) or gained or lost some weight. Somewhere in your closet there are abandoned shoes and clothes worth donating. Or maybe you’re thinking of getting a new sofa. Or finally cleaning off your bookcase. Don’t throw out things that can be re-purposed. Consider donating those items to a qualified charity, and get a tax deduction in return. You can also deduct monetary gifts — even if you put them on a credit card (which might even get you rewards, too!) — as long as you make the donation on or before December 31. Just be sure to get a receipt!
3. Buy a house. OK, so this one’s a little drastic. But if you’re even thinking of buying a house, this is the year to do it from a tax standpoint. That new first-time home buyer’s tax credit that keeps making the headlines? It’s a whopping 10 percent of the purchase price of a new home, with a maximum available credit of $8,000 for a single taxpayer or a married couple filing a joint return. Keep in mind that a credit is a dollar for dollar reduction in your taxes which means that the credit can seriously reduce your tax burden. It’s also refundable, meaning if you don’t owe anything, you get a pretty nice check back.
4. Buy a car. Not interested in a house? How about a car? For 2009, you can claim a deduction equal to the state and local sales and excise taxes paid up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. (To qualify, you have to buy between Feb. 16, 2009, and Jan. 1, 2010.) Unlike the normal sales-tax deduction, the new-car sales-tax deduction is available even if you don’t itemize. If you buy a hybrid, you’ll double your savings. A tax credit is still available for a limited number of qualifying hybrid vehicles — ask your dealer for details.
5. Pay your student loans. If you pay interest on a qualified student loan, you might be able to deduct it on your tax return. You can take the deduction even if you don’t itemize: The student loan interest deduction is treated as an adjustment to income on your form 1040.
6. Have a baby. As a mom, I’ll admit this isn’t much of a trade-off. Kids are more expensive than any corresponding tax breaks. But it is worth noting that the value of the dependency exemption is now $3,650, up $150 in 2009. And while your new bundle of joy probably won’t arrive before December 31 (which needs to happen so you can claim the exemption), think of this as long-term planning.
7. Go green. If you’re considering making some improvements to your home, why not make some environmentally friendly ones? You may receive a tax credit of up to 30 percent of the cost of installing new qualifying energy-efficient water heaters, air conditioners, furnaces, windows and doors — up to a maximum of $1,500. Check out the Energy Star Web site to explore qualified improvements. If you don’t have the cash to pay for improvements up front, consider refinancing your home — remember, home mortgage interest is deductible, too.
8. Keep looking for a job. If you’re out of work, there are a couple of things that should give you hope. One, the economy is finally improving. Two, you can deduct out-of-pocket job-search expenses on your tax return, including résumé-preparation costs, fees paid to employment agencies or job-search Web sites, travel to and from interviews, etc. One caution: You need to be looking for a replacement job in order to claim the expenses. (The job can’t be your first job in a particular profession.)
9. Buy new glasses. New glasses are cute. And they’re also deductible as a medical expense. Since medical expenses are subject to a tax “floor” (meaning that you can only deduct those expenses in excess of 7.5 percent of your adjusted gross income [AGI]), you’ll want to include as many medical expenses as possible when running the numbers. In addition to glasses, consider scheduling some end-of-year checkups (just think how happy it will make your mother) — and be sure to save receipts for parking and tolls required to get to the doc! For further info on medical expense deductions, check here.
10. Hire an accountant. Or buy some decent tax software. Not only will it reduce your overall stress level and save you bucket loads of time, fees related to tax preparation (including the cost of a tax preparation service or accountant, tax software, e-filing, etc.) are deductible in the year you pay them if you itemize.
Remember that there are a lot of phase-outs, caps and other restrictions that may apply to deductions, credits and other tax-shaving measures. These tips may not work for your individual situation. Before taking any action, check with your tax professional for more information. (Yes, you should have a tax professional — see #10.)