10 Ways to Lower Your Taxes

Here's a list of 10 ways to lower your taxes from Kiplinger:

1. Boost your 401(k) contributions.
2. Make the most of your flexible spending account.
3. Buy a house.
4. Buy a car.
5. Sell losing investments.
6. Maximize your tax credits and deductions.
7. Pay college bills.
8. Give to a charity.
9. Max out tax breaks for the self-employed.
10. Keep track of medical expenses.

Here's where I stand on each of these:

1. I've been maxing out my 401k for years, so I get the full tax advantages here.

2. Does a HSA count? If so, I put in the maximum allowed each year.

3. I already have a house and it's been paid off for over a decade -- so I don't get the new homeowner credit or the mortgage interest deduction. And I'm ok with that.

4. I thought about buying a car this year and saving the state taxes, but I think my car will last another (hard) winter and it's probably a better deal to keep it longer. So I'll look for a new car in 2010.

5. I have enough investment losses to carry over for years. Ugh.

6. We're looking at buying a new heater/AC and the $1,500 tax credit is one reason why. That and the fact that the repairman said, "Your heater is making a funny noise. My suggestion is to never turn it on again."

7. Our 529 contributions save us on state taxes (a few hundred dollars a year) because we invest with an in-state 529 plan.

8. Our biggest deduction for the past several years.

9. If you have a business (or a side business), you can save a bundle on taxes by having the business cover many costs (such as a deduction for home office use, magazine subscription, books, computer equipment and support, etc.) I could make much better use of this option, but I seem to maximize revenue and minimize expenses (which is not a bad thing.)

10. I'd prefer to have no medical expenses at all than to have massive ones that save me on taxes (which is probably the same way everyone feels about this issue.) But if you do have big medical bills, it's at least some consolation that they can save you some on your taxes.

Comments

[Patty]

For my two cents and it may make you three cents :)

on #2 above - HSA does count - make the contribution for last year - you have up until April 15th of the next year to make it count and deductible on page 1 above the AGI line.

on #3 above - timing of paying any real estate taxes could assist in lowering taxes if you itemize your expenses. Depending on your income, taxes are a preference for AMT taxes and that's an ouch!

#6 LOL!! I'm looking into it now - by the way there also could be extra rebates - our electric company is paying $500 and the furnace company is paying $400 - that's an additional $900 on top of the $1500!

#5 I understand that "annuity" of a carryover - though - interesting dealing with timing - if you have Capital Loss carryovers and large taxable gains, you may wish to cash out the gain and it will be offset against the carryover. Then buy it back - since it is a gain - wash sale loss rules do not apply.

[Financial Samurai]

Sorry, how does one save taxes by buying a car? I don't understand the explanation. Thnx

[Patty]

Buy purchasing a hybrid model - there is a specific tax credit for doing just that

[FMF]

Samurai --

What don't you understand? Did you click through on the article above and read it?

[Apex]

#10. Hardly ever useful.

This option shows up on almost every list and I have always found it to be a bit rediculous bordering on useless. I know there are situations where it can apply but it seems to me there are only 3 instances where it could ever save you anything and even then its probably pretty small.

1. Is if you have a very low income.
2. Is if you are very very very poorly insured.
3. Is if you choose some expensive elective medical procedure that is not covered by insurance.

The reason is that medical bills are only deductible if you itemize and to the extent that they exceed 7.5% of your AGI. If you are low income you probably don't itemize and if you are high income you probably can't exceed 7.5% of AGI if you have any kind of decent insurance.

Thus if you have an AGI of 50K (which is median income) you have to have medical bills of $3,750 before you could deduct anything and then you could only deduct those amounts over $3,750. For instance if you have 5K of medical expenses you could deduct $1,250 from your taxes. And if you are making 50K you are in the 15% bracket or better so you save $187.50 at best by having 5K of medical bills. If you make 75K or 100K it gets even worse.

So this year my wife has medical bills exceeding 50K. Our out of pocket maximum has been hit at $1,200 for her. Our total out of pocket family maximum is $2,600. So I could never reach an amount of medical bills that was deductible.

I also suspect if you are paying for medical bills out of an HSA then you couldn't count those expenses since they are already paid for with before tax money.

I guess I just don't see this option helping hardly anyone.

[Jim]

#4, I don't like the idea of buying something just to save on taxes. Buy a car if you need one but not simply to save the taxes. Buy a used car and save even more.

#10, About 10M people in 2007 did get deductions from medical/dental. Thats around 7% of filers. There are a variety of ways people get medical expenses large enough to deduct. Out of pocket health care insurance costs are probably a big one. Your insurance premium is a qualified deductible expense. My BIW & sister are self employed and pay $12k a year for insurance so thats a deduction. Elective or uncovered medical costs will add up. I know someone who needs $30k in dental work almost all of which will be out of pocket. Anyone without insurance (all 45M of Americans) who have large out of pocket medical costs can deduct it.