Too many Americans prolong their tax agony by waiting until April 15 to settle up with the IRS. Experts advise, instead, that you take responsible steps all year long to keep the bite and anxiety of taxes to a minimum. Here are ten ways to increase your tax savvy:
- Take advantage of generous retirement plan tax breaks. Make the maximum contribution to your IRA and 401(k), 403(b), 457 or Keogh plan to substantially lower your taxable income. Moreover, the earnings grow tax-deferred until you retire.
- Make full use of allowable business-related deductions. If you must move more than 50 miles due to a job change, you can deduct transportation expenses. A deduction of 30 cents per mile is allowed for business-related auto travel. If you’re self employed, you can deduct 30% of health insurance expenses. Credit card interest on equipment purchases is also deductible.
- Select the most advantageous filing status. Many taxpayers, notably newlyweds, overpay substantially because they don’t know whether to file jointly or separately. Consult an accountant or tax preparer for advice.
- Itemize, itemize, itemize! It requires painstaking recordkeeping, but itemizing can often reduce tax liability measurably. Medical expenses, including travel to and from medical facilities, are deductible if they surpass 7.5% of your Average Gross Income (AGI).
- Develop a tax-planning strategy. Estimate how much income you expect to receive during the coming year. Whether you expect to earn more, less or roughly the same amount as in the current year will determine whether you defer income (for example, by making investments that won’t mature until the following year), or increase your deductions (for example, by making charitable contributions before year’s end).
- Save by giving to your children. Youngsters are generally taxed at a lower rate than parents, so putting funds in a child’s name can result in big savings. The exemption for children under the age of 14 was raised by $100 to $1,300 for 1995. You can also reduce the tax burden on your heirs. Under current law, you and your spouse are permitted to give up to $10,000 a year to as many recipients as you wish without gift tax consequences.
- “Shelter” lump sums from higher tax bites. What happens if you are fortunate enough to come into a large sum of money, such as a pension fund distribution or inheritance? Rolling over such funds into a retirement plan, such as an IRA or Keogh plan, is the single best way to keep a major chunk of your windfall out of the hands of the tax man.
- Adjust withholding to reflect your salary. If you’ve been bumped to a higher tax bracket, don’t forget to adjust your withholding so you won’t be hit with an underpayment penalty. Conversely, if you’ve moved down a bracket or two, adjust withholding so you won’t be paying Uncle Sam too much.
- Get your “nanny tax” refund. You have to withhold Social Security and Medicare taxes for domestic help if you pay them more than $1,000 a year. The old standard required withholding and payment to the federal government for anyone being paid more than $50 per quarter. The new provision is retroactive to 1994, so you may be entitled to a refund for any domestic help paid less than $1,000 that year and for whom you withheld and remitted Social Security and Medicare taxes.
- Be generous! Your charitable deductions remain fully deductible if you itemize. But there’s one catch: new tax rules require written documentation for all donations of $250 or more.