There are more than 300 tax breaks listed in the nearly 4 million words of the complicated U.S. Tax Code, according to the congressional Joint Committee on Taxation. Within that taxing tangle, there are four reasonably easy ways to reduce your tax burden while investing in your future, doing good, and maintaining your lifestyle. Before taking any deductions, discuss the details and ramifications with your tax advisor.
It’s the American dream for many. In addition to all of the emotional incentives for home ownership, there are some generous federal tax advantages. All points and mortgage interest payments of up to $1 million annually on your primary residence are deductible, as well as property taxes. Even a vacation home earns a mortgage interest tax break as long as you spend at least 14 days a year in that second residence. When it’s time to sell, as much as $500,000 in home profit is tax free for married couples filing jointly, and up to $250,000 for single filers.
Got a favorite cause? As long as you donate to a qualified charity, your contribution can be fully deducted from your earned income. The qualification status of a charity can be found by visiting the IRS at irs.gov/charities or by calling 877-829-5500. Your expenses in support of the organization can also be deducted from your federal tax bill. For instance, your mileage to and from meetings or events and the fair value of the goods you contribute to a charitable auction are valid exemptions.
Retirement Savings Accounts
Saving for retirement is critical for your long-term financial security, but there are present-day advantages as well. The money contributed to a traditional 401(k) fund is tax deferred -- you won't face state or federal taxation until your money is later withdrawn. Investors under the age of 50 can contribute up to $17,000 annually. Those over 50 can contribute another $5,500, or $22,500 in total. Taxation only occurs on withdrawals, and at the rate of any other revenue source. Also consider a Roth IRA or Roth 401(k). With Roth accounts, the tax scenario is reversed compared to a traditional 401(k). You'll be taxed in the year of contribution, but Roth funds can be withdrawn tax-free after retirement. The age for eligible withdrawals from retirement accounts is 59 ½. The potential pitfall of both types of retirement accounts is the steep 10-percent additional tax penalty for early withdrawals. The penalty is on top of any state or federal taxes that must be paid, which depend on the type of account it is, and, in the case of a Roth account, whether you withdrew any earnings or only your own contributions.
A bond is basically an I.O.U from a corporation or government entity that wants to use your money to fund day-to-day operations or a specific project. Municipal bonds issued by cities might finance local projects such as roads or bridges, new schools, or a water treatment plant. The interest earned on these local bonds is tax-free. The tradeoff is that municipal bonds typically pay less than many other types of bonds. Your accountant or tax preparer can help you decide, based on your taxable income and financial goals, whether tax-free municipal bonds belong in your portfolio.
- Financial Industry Regulatory Authority (FINRA): Tax-Deferred and Tax-Free Accounts
- Forbes: Giving To Charity? Great. Staying Off IRS Radar? Priceless.
- Bankrate.com: Home Sweet Home Ownership Tax Breaks
- CNN Money: Ultimate Guide to Retirement
- Kiplinger: 71 Ways to Cut Your Tax Bill
- IRS: Publication 526 – Main Content
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