What time of year causes headaches, stress and frustration for millions of Americans every year? Tax time.
Tax time causes more stress than demanding in-laws and drunken cousins at holiday parties. Fortunately, the tax code works for you in many ways, some complicated and some obscure. Here’s a start to demystifying deductions and getting the most from your tax return.
Pre-taxed, Tax-Deductible and Saving The Most On Your Taxes
A simple step which many overlook is adjusting your withholding. The money withheld from your paycheck is like an interest-free loan from you to the government. Keep more of your money and put it into a savings account or your 401(k) where you reap the benefits.
Uncle Sam wants you to save for your retirement. Your contributions to a 401(k) through your employer are taken from your paycheck before taxes and money put into a traditional IRA is tax-deductible.
Track your medical spending during the year and during your next open enrollment period you can open a flex spending account, which diverts money from each paycheck pretax. Money in a medical care FSA pays medical expenses not covered by insurance, such as deductibles, copayments, and over-the-counter medical devices such as bandages or crutches. A dependent care FSA uses pretax money for childcare, adult care for dependent senior citizens, or care for a disabled dependent. Just remember that you forfeit any money left in the account at the end of the year, so estimate your health care costs conservatively.
If you work as an educator, you can deduct up to $250 of supplies purchased out-of-pocket on your 1040 and additional costs over $250 on Schedule A.
If you’re working two jobs, you could use a break! Fortunately, the tax code gives you one. Travel between the two jobs is considered a business expense and therefore is deductible at .50 per mile.
If you change jobs and your new job is more than 50 miles away from your previous job, you can deduct all costs associated with the move, including storage, personal transportation and lodging. There is no limit on the amount of this deduction.
Small Business Owners, Big Tax Breaks
If you own a small business, you will want to keep an especially sharp eye out for deductions. When you open your own business, you can deduct up to $5000 of startup costs.
If you drive a vehicle for business purposes, many of the associated expenses are tax-deductible. You can choose the actual expenses or standard deduction method, whichever gives the greater deduction for your situation. When you purchase a new or used vehicle for your business, you can choose to take a deduction in the first year or depreciate over several years.
Since you are the most vital part of your small business, you can deduct expenses of education to maintain or improve skills required in your current business or occupation.
What about business lunches and the occasional business trip? Half of the cost of entertaining present or potential clients can be deducted, provided that business is discussed during or immediately before or after the entertaining. For those who are self-employed, the entire cost of entertaining can be deducted.
Similarly, you can deduct most of your expenses for business travel, including transportation, lodging, and meals. If you combine the trip with your family vacation, you can still deduct your own expenses, but not those incurred by the rest of the family.
You can also write off advertising costs, including goodwill advertising like sponsoring a community event and putting your company name on t-shirts and pens.
Even if you don’t have a small business, you may still be able to take deductions for a hobby. You can deduct expenses up to the amount of income earned from it. The opportunities to get a break are endless; it is all a matter of keeping track.
Clean out your attic and make charitable donations. You can earn deductions on goods donated as long as the organization to which you donate is approved by the IRS. Any donation worth over $250 requires a receipt, and anything over $5000 requires written appraisal of its fair market value. There are limits to the deduction based on your adjusted gross income, but contributions above the limit can be carried over to the following tax year. Remember that you must itemize to receive these deductions, so keep careful records of your contributions during the year.
If you drive to a location to volunteer or use your car for volunteer work, you can deduct 14 cents per mile plus parking fees. If you use public transportation, that cost is also deductible.
Your peace of mind can be tax deductible. If you spent money to manage money, such as paying a financial advisor to look over your portfolio, you can deduct those expenses from your taxes. If you dread doing your own taxes every year or feel less than confident in your ability to interpret the US tax code, remember this: if you used a paid service like TurboTax or H&R Block, you can actually deduct the cost of tax preparation from your taxes. When you store your investment-related documents in a safe deposit box, you know your documents are safe and can deduct the rental fee.
You can get tax credits (not just deductions) for making your home more energy-efficient. Purchasing heating and cooling products like a geothermal system gives a tax credit of up to 30% of the cost, and home improvements can add tax credits of 10% of the cost, not exceeding $500.
In short, don’t panic. Saving on your taxes can be simple and painless if you keep good records of how far you drive and why, save receipts, plan for retirement, and give to charity. Following these guidelines will save on taxes, lessen the pain of tax season, and give you more time to spend with your charming in-laws and your favorite cousins.