As a single or recently married person with a blossoming career and no children, you can find yourself with limited ways to lower your tax bracket. Even if you don't want to tie the knot just for the joint filer tax brackets or have a baby just for the child tax credit and the dependency exemption, there are still ways to lower your tax burden.
Retirement may seem like a long way away, but putting money into a tax-deferred account can result in some significant current-year tax savings. Deferring money into an employer plan, such as a 401(k) plan or 403(b) plan, lowers your taxable income. If you've already maxed out your employer plan, you can still contribute another $5,000 to a traditional IRA, but you might not be able to deduct it if your income is too high. If you're self-employed without an employer plan, consider starting an SEP IRA, which can allow you to defer additional compensation in addition to your traditional IRA contribution.
Stagger Charitable Donations
Depending on how generous you are each year, you might be missing out on deducting your charitable contributions because you don't give enough to itemize. For example, the standard deduction for the 2011 tax year for joint filers is $11,600, so if you only gave $7,000, it might not be worth it to itemize. However, if you stagger your donations so that you give $14,000 in one year and none the next, you would be able to take full advantage of your charitable contribution in the first year and still claim the standard deduction the following year.
If you have a home mortgage, you may already be writing off your home mortgage interest. However, if you have a mortgage on a second home, even a timeshare, you can include that as well up to the limit of the first $1 million of mortgage interest. Also, you can include private mortgage insurance premiums if your income falls below the annual limit and you took out the mortgage after 2006. If you are considering purchasing a home, closing early in the year can give you greater tax savings. If you close in November or December, you only have a month or two of mortgage interest, so it might not be worth it to itemize. If you don't itemize, you are limited to amortizing the cost of the points over the life of the mortgage, so instead of several thousand in one year, you might get a just a couple hundred a year over the next 30 years. If you close early in the year, you will pay more mortgage interest, increasing the odds that itemizing makes sense for you.
Choose Your Investments Wisely
Though many people cry "unfair!" when the IRS releases statistics showing the low average tax rate that many of the wealthiest Americans pay, it's all legal (well, all that we know about). The reason wealthier Americans get away with the lower rate is most of their income comes from long-term capital gains. Long-term capital gains rates apply to your income from investments you held for more than one year, such as stocks or an investment property. Therefore, when considering which investments you want to sell, consider the tax implications of holding them long enough to reap the benefits of the long-term capital gains tax rates.
- Thomas Northcut/Photodisc/Getty Images
- How Is Credit Card Interest Compounded?
- How to Have a Repo Removed from Your Credit Before Seven Years
- How Cosigned Loans Affect a Credit Report
- Credit Repair Made Simple
- Auto Financing With High FICO Scores
- How to Find Out What Accounts Are Open on a Credit Report
- How to Correct Negative Remarks on a Credit Report
- What Can You Do if Your Mortgage Company Will Not Work With You?
- What to Do If You Can't Pay Your Auto Loan
- Things to Know Before You Buy Real Estate