Older families should make these moves throughout the year to keep their bill low at tax time. Here are the areas where you should look for savings:
Tax Savings For: Work | Car and Home | Charitable Contributions | Estate Planning | Inheritance | Investments and Retirement Savings | Medical Expenses | Rental Property
Give yourself a raise.
If you got a big tax refund this year, it meant that you're having too much tax taken out of your paycheck every payday. So far this year, the average refund is nearly $2,800. Filing a new W-4 form with your employer (talk to your payroll office) will insure that you get more of your money when you earn it. If you're just average, you deserve about $225 a month extra. Try our easy withholding calculator now to see if you deserve more allowances.
Go for a health tax break.
Be aggressive if your employer offers a medical reimbursement account — sometimes called a flex plan. These plans let you divert part of your salary to an account which you can then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money, and that can save you 20% to 35% or more compared with spending after-tax money. Use our handy calculator to figure out how much you can save.
Don't be afraid of home-office rules.
If you use part of your home regularly and exclusively for your business, you can qualify to deduct as home-office expenses some costs that are otherwise considered personal expenses, including part of your utility bills, insurance premiums and home maintenance costs. Some home-business operators steer away from these breaks for fear of an audit. But a new IRS rule that takes effect this year will make it easier to claim this tax break. Instead of calculating individual expenses, you can claim a standard deduction of $5 for every square foot of office space, up to 300 square feet.
Time receipt of self-employment income.
Those who run their own businesses have a lot of flexibility at year-end. To push the receipt of income into the following year , delay mailing bills to clients until late in December that payment is received after December 31. Or, pay business expenses before January 1 to lock in deductions.
Pay back a 401(k) loan before leaving the job.
Failing to do so means the loan amount will be considered a distribution that will be taxed in your top bracket and, if you’re younger than 55 in the year you leave your job, hit with a 10% penalty, too.
Convert a vacation home to your principal residence.
Until 2009, there was a sweet tax break for folks who sold their homes, claimed tax-free profit and then moved into a vacation property. After they lived in that home for two years, they could sell and claim tax-free profit again, including appreciation from the days the place was a vacation home. There can still be some real tax benefits to this strategy, but the value has fallen. A portion of any profit on the sale of a vacation-home-turned-principal-residence will not qualify as tax-free home-sale profit. The taxable portion will be based on the ratio of the time after 2008 the property was used as a vacation home to the total period of ownership.
Use an installment sale of real estate to defer a tax bill.
If the buyer pays you in installments, the IRS will let you pay the tax bill on your profit in installments, too. You must charge interest on the deal, and each payment you receive will have three parts: interest (taxable at your top rate), capital gain (taxed at a maximum of 15%) and return of your investment (tax-free).
Tote up out-of-pocket costs of doing good.
Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (worth 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.