Leave no tax deduction or credit unturned. You’ll save the most money on your tax return by making sure you know about every possible deduction or credit. Don’t be afraid to take legitimate deductions since you’re entitled to them. The rules change every year, so stay informed.
Get Professional Help
Hiring an accountant will spare you headaches, and the professional’s knowledge of the tax code can help you save money. Alternatively, you can use tax software programs to file your taxes. They are designed to prompt you with helpful advice. Don’t forget to directly consult the IRS, which has a website chock-full of useful information on deductions and tax credits.
Check Your Return
Before you file your return, make sure that you completed it fully and signed it. Mistakes can be interpreted as being deliberate and trigger a costly audit. If you cannot file on time, file an extension. Be aware that if you fail to pay at least 90 percent of what you owe by tax day on April 15 you will be liable for penalties.
You have until Dec. 31 to put money into your 401(k) and until the following April 15 to invest in your traditional or Roth IRA. Traditional IRA and 401(k) contributions are tax-deductible in the year you make the contributions. They will immediately save you money, but you’ll be taxed on their distributions when you retire. The Roth IRA has no immediate tax benefit, but you’ll save big in retirement when you’re able to take Roth IRA distributions tax-free.
Every cloud has a silver lining. If you lost money on investments, you can deduct up to $3,000 in losses from your income tax. If you sold at a loss greater than $3,000, you may carry over any additional loss into subsequent tax years. For example, if you sold shares of stock for a total loss of $12,000, you may tax deduct $3,000 a year for four years. Every stock investor picks a loser on occasion, so chin up and turn that loss into a tax benefit.
The home mortgage interest deduction is one of the best tax breaks you’ll ever get. If you mail your January mortgage payment by Dec. 31, you can deduct the interest from your taxes in the year that you mail the payment. Real estate taxes, which you have already paid to your city or county, are also deductible from income taxes. Even if you don’t itemize your taxes, student loan interest is deductible if you meet the income limit requirements.
It pays to be nice. Charitable contributions are tax-deductible if they are given to a qualified organization. Consider donating stock to a charity. You get a tax deduction for its full fair market value, and if it has appreciated considerably since you first bought you’ll also avoid paying capital gains tax. Personal property donated to a charity, such as furniture dropped off at Goodwill, is also tax-deductible based on fair market value. Get a receipt when you make the donation.
Other Ways to Save
If you invest in any mutual funds with foreign holdings, you can deduct any taxes paid to foreign governments. These will be stated on your 1099 forms. Each year federal and local governments come up with special tax breaks, such as deductions or credits for energy-efficient technologies. See if any tax breaks are scheduled for the upcoming year. You can invest some money in tax-free government bonds. The bonds may not bring hefty returns, but they are a relatively safe investment with tax-free earnings.
- "The Wall Street Journal": A Tax-Break Tutorial for New Homeowners
- Bankrate: Capital Losses Can Cut Taxes
- MSN Money: Give and Grow Rich With Charitable Deductions
- Bankrate: How Do I Cut My Taxes?
- MSN Money: Tax Shelters Still Exist and Can Save You Money
- MSN Real Estate: Early Year-end Mortgage Payment Could Cut Taxes
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.