KIPLINGER TAX CENTER
TRUSTED ADVICE TO HELP YOU LOWER YOUR TAX BILL
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Single taxpayers should plan these moves throughout the year to reduce taxable income and increase tax deductions. Here are the areas where you should look for tax savings:
At work
Car and home
College and other expenses
Family planning
Inheritance
Retirement savings
AT WORK
Give yourself a raise. The odds are high that you're having too much tax taken out of your paycheck every payday. The evidence is clear if you have a big refund coming. In 2008, the IRS issued nearly 107 million refunds averaging $2,400. So far this year, the average refund is even more: $2,700. Filing a new W-4 form with your employer (get one from your payroll office) will insure that you get more of your money when you earn it. See our easy-to-use withholding calculator to help you figure how many allowances you should claim. Suggest that your husband or wife do the same. This correction could save you $225 a month.
Flex your tax-saving muscle. 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 money run through the account. Paying medical bills with pretax money can save you 20% to 35% or more compared with spending after-tax money.
Switch to a Roth 401(K). If your employer offers the new breed of 401(k), seriously consider opting for it. Unlike the regular 401(k), you don't get a tax break when your money goes into a Roth, but younger workers are often in lower tax brackets ... so the break isn't so impressive anyway. Also unlike a regular 401(k), money coming out of a Roth 401(k) in retirement will be tax-free ... at a time you may well be in a higher bracket.
Be smart if you're a teacher or aide. Keep receipts for what you spend out of pocket for books, supplies and other classroom materials. You can deduct up to $250 of such out-of-pocket expenses ... even if you don't itemize.
Track costs of a job-related move. If the new job is at least 50 miles farther from your old home than your old job was, you can deduct the cost of the move . . . even if you don’t itemize expenses. If it’s your first job, the mileage test is met if the new job is at least 50 miles away from your old home. If you move after getting married, either you or your new spouse has a job at the new location, you can deduct the cost of moving yourselves and your belongings (including all those wedding presents). If you drive your own car, you can deduct 24 cents a mile, plus parking and tolls.
Tally job-hunting expenses. As long as you're looking for a new position in the same line of work, you can deduct job-hunting costs, including travel expenses such as the cost of food, lodging and transportation, if your search takes you away from home overnight. Such costs are miscellaneous expenses, deductible to the extent all such costs exceed 2% of your adjusted gross income. More on Miscellaneous Deductions.
Pay tax sooner than later on restricted stock. If you receive restricted stock as a fringe benefit, consider making what's called an 83(b) election. That lets you pay tax immediately on the value of the stock rather than waiting until the restrictions disappear when the stock "vests." Why pay tax sooner rather than later? Because you pay tax on the value at the time you get the stock, which could be far less than the value at the time it vests. Tax on any appreciation that occurs in between then qualifies for favorable capital gains treatment. Don't dally: You only have 30 days after receiving the stock to make the election.
Pay back a 401(k) loan before leaving a 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 the job, hit with a 10% penalty, too.
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of an educational assistance tax free each year. That means the boss pays the bills but the amount doesn't show up as part of your salary on your W-2. The courses don't even have to be job related and even graduate-level courses qualify.
CAR AND HOME
Save that receipt. Buyers of new vehicles can deduct the sales tax paid on the purchase, even if they don't claim sales taxes as itemized deductions. They can add the tax they pay to their standard deduction. This break applies to new cars, motor homes, light trucks and motorcycles purchased after February 16, 2009 and before January 1, 2010. Sales tax paid on the first $49,500 of cost qualifies. The benefit begins phasing out for married couples with AGIs over $250,000 and singles with adjusted gross incomes over $125,000, and is completely gone for single filers with adjusted gross income of $135,000 or more or joint filers with AGI of at least $260,000. Itemizers can claim this deduction only if they elect to deduct state sales taxes in lieu of state income taxes.
Buy a hybrid, take Uncle Sam for a ride. You can drive away with a credit that will reduce your tax bill dollar for dollar if buy a gasoline/electric hybrid or qualifying clean-diesel vehicle in 2009. The size of the tax credit depends on how fuel-stingy your new car is, but the savings can range from several hundred dollars to over $3,000.
Use a Roth to save for your first home. Sure, the “R” in IRA stands for retirement, but a Roth IRA can be a powerful tool when you’re saving for your first home. All contributions can come out of a Roth at any time, tax- and penalty-free. And, after the account has been opened for five years, up to $10,000 of earnings can be withdrawn tax- and penalty-free for the purchase of your first home. Assume $5,000 goes into a Roth each year for five years, and the account earns an average of 8% a year. At the end of five years, the Roth would hold about $31,680—all of which could be withdrawn tax- and penalty-free for a down payment.
COLLEGE AND OTHER EXPENSES
Let Uncle Sam pay part of your education expenses. If you’re paying your own tuition for a graduate course or other training, you may qualify for a Lifetime Learning Credit that’s worth 20% of up to $10,000 of qualifying expenses. That could knock as much as $2,000 of your 2009 tax bill. The right to claim this tax saver is phased out if your income exceeds $50,000 on a single return or $100,000 on a joint return.
Deduct expenses even if you don't itemize. Taxpayers who claim the standard deduction often complain that itemizers get the better deal. But that’s not true. The only reason to use the no-questions-asked standard deduction is if it’s bigger than the total you could deduct if you itemized. And, you can deduct a lot of things even if you don’t itemize, including student loan interest, job-related moving expenses, costs incurred by reservists and performing artists and contributions to health savings accounts and IRAs. Also, in 2009 homeowners who don’t itemize can boost their standard deduction amount by up to $500 (single) or $1,000 (joint returns) for property taxes they paid. And, casualty losses -- which used to be deductible only by those who itemize – can also be added to the standard deduction. Keeping good records will save you money.
FAMILY PLANNING
Deduct interest paid by Mom and Dad. Until recently, parents had a good reason not to help their children pay off student loans. If the parents were not liable for the debt, then no one got to deduct the interest. Now, however, when parents pay, it's treated as if they gave the money to the real debtor, who then paid off the loan. The child gets the tax deduction, as long as the parents can't claim him or her as a dependent, even if he or she doesn't itemize.
Time your wedding. If you're planning a wedding near year-end, put the romance aside for a moment to consider the tax consequences. The tax law still includes a "marriage penalty" that forces some pairs to pay more combined tax as a married couple than as singles. For others, tying the knot saves on taxes. Consider whether Uncle Sam would prefer a December or January ceremony.
Marry your withholding, too. Tying the knot means a lot to your Uncle Sam, too. Before the wedding, soon-to-be husband and soon-to-be wife should get a W-4 form and figure how to arrange withholding from your paychecks to match your new tax status.
INHERITANCE
Roll over an inherited 401(K). If a parent, grandparent or other generous soul bequeaths to you a 401(k) plan, take advantage of a rule that arrived in 2007. It allows you to roll over the account into an IRA and stretch payouts (and the tax bill on them) over your lifetime. This can be a tremendous advantage over the old rules that generally required such accounts be cashed out, and all taxes paid, within five years.
INVESTMENTS AND RETIREMENT SAVINGS
Check the calendar before you sell. You must own an investment for more than one year for profit to qualify as a long-term gain and enjoy preferential tax rates. The "holding period" starts on the day after you buy a stock, mutual fund or other asset and ends on the day you sell it.
Don't buy a tax bill. Before you invest in a mutual fund near the end of the year, check to see when the fund will distribute dividends. On that day, the value of shares will fall by the amount paid. Buy just before the payout and the dividend will effectively rebate part of your purchase price, but you'll owe tax on the amount. Buy after the payout, and you'll get a lower price, and no tax bill.
Make your IRA contributions sooner rather than later. The sooner your money is in the account, the sooner it begins to earn tax-deferred or, if you use a Roth IRA, tax-free returns. Over a long career, this can make an enormous difference.
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