Ten Tips for the Tax-Savvy

Saved money is earned money. One of the secrets of the rich is that they’ve found ways to keep more of their money. With that principle in mind, here are 10 tips to help you do the same thing, and keep you on the road to your first (or second) million:

  1. For goodness sakes, get organized! Replace that shoebox with a real tax file. Develop a simple filing system; by dates, types of purchase, whatever works for you. Anytime you conduct a transaction that may have tax implications, deposit the receipt in the file. Also, highlight any purchases in your checkbooks throughout the year that may be of tax consequence.
  2. Kids are deductible. If you have qualifying children, make sure that you’re taking the Child Tax Credit. And don’t forget the Dependent Care Credit if you’re both working.
  3. If you’re married, fund two IRA’s. Even if only one spouse has a job, a Spousal IRA allows the nonworking spouse to defer taxes on money contributed to it. Also, if at all possible, increase your retirement contributions to the maximum allowable, which will further decrease your taxable income. In addition, you may also qualify for the Retirement Tax Credit.
  4. If you’re planning a large charitable contribution, make it in the year that you expect the most income. The higher your tax bracket, the more you’ll benefit from the deduction.
  5. Staying in the “charity begins at home” vein, go through your belongings for any unused clothing, appliances, furniture, luggage, even cars to donate to charity. If you itemize, these noncash charitable contributions are very deductible. Don’t overvalue them, but don’t undervalue them, either. And be sure to get receipts for every noncash donation.
  6. Be aware of the Alternative Minimum Tax (the dreaded AMT). This one applies to more and more people yearly as the AMT snags people in lower and lower income brackets. Be proactive. Look at your tax liability throughout the year, not just at the end, to determine if you’re in danger of being hit with this tax. If you are, you may want to reconsider any accelerated mortgage payments or the like. Many regular tax deductions are not included on the AMT side, which could dramatically increase your tax liability.
  7. As much as you can, bundle together all your major medical procedures in the same year. To be deductible at all, these expenses must exceed 7.5% of your adjusted gross income (AGI). If the kids’ braces put you close to that threshold, then consider getting that laser eye surgery you’ve been thinking about during the same tax year to maximize your benefit. And don’t forget about your health insurance premiums; they’re deductible too.
  8. Turn your nondeductible interest into deductible interest with a home equity loan. Use the proceeds to pay off your car, credit cards, or any interest that you’re paying which can’t be deducted.
  9. If you refinance your home, don’t forget old points. All unamortized points of an old refinance can be deducted in the year of a new refinance. For example, if you refinanced in April of 2005 and again in April of 2006, you can deduct all of the remaining points of the 2005 loan on your 2006 taxes, along with the amortized points of the new loan.
  10. Don’t forget about unreimbursed employee business expenses, which are allowed as itemized deductions, provided that they exceed 2% of your AGI when bundled with other miscellaneous expenses. Just keep careful records of all of your expenses.
  11. (Because you deserve more) Don’t neglect the information that the IRS makes available to you at their website. All forms, booklets, and details on any tax changes are there. Get it “straight from the horse’s mouth”. You may even qualify for free electronic filing.