71 Ways to Save on Taxes Now!

Many of our clients make the mistake of waiting until the end of the year (or tax-filing time) to see what they can do to lower their taxes. The following article, the first of a three-part series, discusses everyday actions that taxpayers can take to lower their annual tax bill.



71 Ways to Save on Taxes Now
by Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
provided by Kiplinger.com

PART 1 of 3

Don't wait until you file your return to find ways to lower your tax bill. These moves will help you save throughout the year.

If you managed to claim every possible tax break that you deserved when you filed your 2009 return this spring, pat yourself on the back. But don't stop there. Those tax-filing maneuvers are certainly valuable, but you may be able to rack up even bigger savings through thoughtful tax planning all year round. The following ideas could really pay off in the months ahead.

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 $2,900, up about $200 from last year. 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. If you're just average, you deserve about $225 a month extra.

Boost your retirement savings.
One of the best ways to lower your tax bill is to reduce your taxable income. You can contribute to up to $16,500 to your 401(k) or similar retirement savings plan in 2010 ($22,000 if you are 50 or older by the end of the year). Money contributed to the plan is not included in your taxable income.

Switch to a Roth 401(k).
But if you are concerned about skyrocketing taxes in the future, or if you just want to diversify your taxable income in retirement, considering shifting some or all of your retirement plan contributions to a Roth 401(k) if your employer offers one. Unlike the regular 401(k), you don't get a tax break when your money goes into a Roth. On the other hand, money coming out of a Roth 401(k) in retirement will be tax-free, while cash coming out of a regular 401(k) will be taxed in your top bracket.

Fund an IRA.
But if you are concerned about skyrocketing taxes in the future, or if you just want to diversify your taxable income in retirement, considering shifting some or all of your retirement plan contributions to a Roth 401(k) if your employer offers one. Unlike the regular 401(k), you don't get a tax break when your money goes into a Roth. On the other hand, money coming out of a Roth 401(k) in retirement will be tax-free, while cash coming out of a regular 401(k) will be taxed in your top bracket.

If you don't have a retirement plan at work, or you want to augment your savings, you can stash money in an IRA. You can contribute up to $5,000 in 2010 ($6,000 if you are 50 or older by the end of the year). Depending on your income and whether you participate in a retirement savings plan at work, you may be able to deduct some or all of your IRA contribution. Or, you can choose to forgo the upfront tax break and contribute to a Roth IRA that will allow you to take tax-free withdrawals in retirement.

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.

Pay child-care bills with pre-tax dollars.
After taxes, it can easily take $7,500 or more of salary to pay $5,000 worth of child care expenses. But, if you use a child-care reimbursement account at work to pay those bills, you get to use pre-tax dollars. That can save you one-third or more of the cost, since you avoid both income and Social Security taxes. If your boss offers such a plan, take advantage of it.

Ask your boss to pay for you to improve yourself.
Companies can offer employees up to $5,250 of 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.

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.

Tally job-hunting expenses.
If you count yourself among the millions of Americans who are unemployed, make sure you keep track of your job-hunting costs. As long as you're looking for a new position in the same line of work (your first job doesn't qualify), 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.

Keep track of the cost of moving to a new job.
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. You can deduct the cost of moving yourself and your belongings. If you drive your own car, you can deduct 16.5 cents per mile for a 2010 move, plus parking and tolls.

Save energy, save taxes.
This is the last year to cash in on a tax credit for home improvements designed to save energy. One tax credit is worth 30% of the cost of new insulation, doors, windows, high-efficiency furnaces, water heaters and central air conditioners up to a maximum credit of $1,500. The credit applies to both 2009 and 2010, so if you took full advantage of it last year, you don't get another crack at it. But if you didn't make any eligible home improvements in 2009, get busy before this opportunity slips away. Don't think you need to do anything?

Think green.
A separate tax credit is available for homeowners who install alternative energy equipment. It equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, and wind turbines, including labor costs. There is no cap on this tax credit.

Put away your checkbook.
If you plan to make a significant gift to charity in 2010, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year instead of cash. Doing so supercharges the saving power of your generosity. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit. However, don't donate stocks or fund shares that lost money. You'd be better off selling the asset, claiming the loss on your taxes, and donating cash to the charity.

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 (at 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.

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. And, whether you have one job between you or two or more, revise withholding at work to reflect the tax bill you'll owe as a couple.

Beware of Uncle Sam's interest in your divorce.
Watch the tax basis -- that is, the value from which gains or losses will be determined when property is sold -- when working toward an equitable property settlement. One $100,000 asset might be worth a lot more -- or a lot less -- than another, after the IRS gets its share. Remember: Alimony is deductible by the payer and taxable income to the recipient; a property settlement is neither deductible nor taxable.