We’re always looking for ways to help you save money.
That’s why we compiled 25 tax-saving tips to help you reduce your tax burden and begin your planning for next year. The following list includes ideas for individuals and small-business owners, so be sure to read the entire list (#28 is our favorite for self-employed clients). If you have questions about how these tips may apply to your situation, please call use as soon as possible—especially if you’re taking steps this year to minimize your tax burden.
- Earn tax credits for energy-saving home improvements. Under the Energy Tax Incentives Act of 2005, you may qualify for tax credits by making certain home improvements. Some improvements need to be completed this year, but many don’t. Check out www.energystar.gov for all the details.
- Take advantage of your employer’s flexible spending account. Increase the amount you set aside for next year in your employer’s health flexible spending account if you set aside too little for this year. You can get tax-free reimbursements for all kinds of medical expenses including over-the-counter medications. Also, new rules allow your plan to permit a grace period after year-end for using remaining amounts.
- Make the most of your 401(k) employer match! Nothing will build your retirement fund faster than the employer-match contribution to your tax-free 401(k). Many companies offer 50 cents for every dollar you contribute, up to 6% of your salary. Where else can you get that kind of return on your investment? We encourage you to put at LEAST 6% of your salary in a 401(k) to get all the “free money” you can.
- Make a deductible IRA contribution, even if you don’t work. If your spouse is the breadwinner while you manage the home front, you can make a deductible IRA contribution. Even if your spouse is covered by an employer-provided retirement plan, you can still make a fully deductible IRA contribution as long as your joint Adjusted Gross Income doesn’t exceed $150,000.
- Take a medical expense deduction for certain home improvements. A medical expense deduction may be claimed if you make a medically necessary home improvement, such as a lift or elevator for a handicapped person, or a therapy spa for an arthritis sufferer.
- Defer your bonus until next year. If you usually get an annual bonus check in December, ask your employer to provide it next January so you can reduce your taxable income for this year.
- Pay next year’s property taxes this year. If your tax bracket will be higher this year than next, pay next year’s property taxes this year to increase your allowable deductions for this year.
- Shift your income or assets to other family members and save on gift and estate taxes. Shelter your gifts via the annual gift tax exclusion before the end of the year. Currently you can give $13,000 per individual, per year, to an unlimited number of individuals.
- Carefully consider the timing of changes in your marital status. If you’re contemplating marriage or divorce, consider how marriage penalties could affect you. Marriage penalty relief has been extended for the 15% tax bracket and the standard deduction, but other marriage penalties remain.
- Keep an eye on tax liability thresholds. Many tax breaks are lost if you exceed a certain income level or Adjusted Gross Income (AGI.) Reducing your AGI to just below the maximums could make a big difference. Please give us a call for assistance!
- Get a tax-free gain from a home used as rental property. If you’ve been renting a property that you’re going to sell, up to $250,000 of gain from the sale could be tax-free if you owned and used the property as your principal residence for at least two of the five years preceding the sale. This is tricky, so please contact us to discuss your situation.
- Build college savings tax-free via a Section 529 Account. Maine’s Finance Authority of Maine (FAME) offers the NextGen College Investing Plan. This Plan’s earnings grow federal income-tax-deferred and are currently tax-free as long as the withdrawals are used for qualified higher-education expenses. Details: http://www.famemaine.com/nextgen.asp.
- Consider NOT claiming a dependency deduction for a child in college. If you pay college tuition for your child and your income is too high for you to claim education credits, you may not benefit from the dependency deduction. Instead, if your child has enough taxable income to make use of most or all of the credit, your child can claim it on his or her return, which may be a greater value.
- Claim a moving expense deduction because of your spouse’s job. Job-related moving expenses are deductions that can be claimed even by non-itemizers. Even if you don’t personally qualify, you can claim the write-off if your spouse does and you file jointly.
- Minimize taxes on your capital gains; maximize tax benefits from your losses. Timing is everything. If you have capital gains or losses from sales of stock or other capital assets, or if you have stock or other capital assets that are ripe for sale, we can help you coordinate the timing of your gains and losses for the greatest tax advantage.
- Bundle your miscellaneous expenses. You could possible save taxes this year and next by applying a “bunching strategy” to miscellaneous itemized deductions. For example, consider extending professional journals subscriptions, paying union or professional dues, paying tuition for job-related courses, etc.
- Write off tutoring costs as a business-education expense. If you hire a consultant to teach you a skill that will enhance your work, the cost is deductible as an education expense on Schedule A, Form 1040 as a miscellaneous itemized deduction, to the extent that your cumulative total exceeds 2% of your AGI.
- Give yourself a bigger expense-deduction this year. Consider using a credit card to prepay expenses that can generate business deductions for this year.
- Beef up your business equipment purchases before December 31. Consider making business equipment expenditures that qualify for the Section 179 deduction up to the current expensing cap. (Ask us for details.)
- Use employee pay to help you write off business equipment. If this is a startup year for you and there’s no money coming in, there’s no business equipment expensing for this year. However, your salary as an employee counts as taxable income for the expensing limit.
- Delay earned income by sending this year’s bills next year. If your clients don’t mind, send your December bills in January so you don’t increase this year’s taxable income any further.
- Employers: review health insurance and other benefits to take advantage of tax-favored plans (HSA, HRA, etc.). Besides the tax advantages, any cash savings of switching to a more “consumer-driven” high-deductible plan, could fund other employee benefits (retirement plan, HSA, etc.) that your employees would keep.
- Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. If you made a Roth IRA contribution this year, it may help you when you take tax-free payouts at retirement, but the contribution isn’t tax-deductible. If you need the deduction that a contribution to a regular IRA yields now, in certain situations you can change your mind and turn the Roth IRA contribution into a traditional IRA contribution.
- Consider incorporating your business. Self-employment taxes can be daunting, especially if you’re a sole-proprietor. If you incorporate and elect Subchaper S, you can enjoy the benefits of limited personal liability, but also potentially pay less in taxes, namely the self-employment/FICA tax.
- Give to charitable organizations. You’ll save on taxes when you donate unused goods, equipment or supplies to charity and deduct them at tax time. Be sure to keep receipts.
Our financial articles are presented by Honeck O’Toole, Maine-based certified public accountants. If you ever have questions about your finances, email us or call 207-774-0882.