Tax Savings for All Taxpayers
Don't wait until you file your return to find ways to lower your tax bill. These moves will help you save throughout the year.
April 2009
Advertisement
Once you take advantage of every possible tax-saving opportunity on your 2008 tax return, we can let you in on a dirty little secret: The best chances for savings come before you put pen to paper ... through the actions you take during the previous year at the countless intersections between the tax law and your daily life. The following ideas could prove very valuable to you in the months ahead.
Give yourself a raise. The odds are high that you're having too much tax taken out of your paycheck every payday. The evidence is clear if you have a big refund coming. In 2008, the IRS issued nearly 107 million refunds averaging $2,400. So far this year, the average refund is even more: $2,700. Filing a new W-4 form with your employer (get one from your payroll office) will insure that you get more of your money when you earn it. If you're just average, you deserve almost $225 a month extra. Try our easy withholding calculator now to see if you deserve more allowances.
Put away your checkbook. If you plan to make a significant gift to charity in 2009, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year instead of cash. Doing so supercharges the saving power of your generosity. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, and you never have to pay tax on the profit.
Tote up out-of-pocket costs of doing good. Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (at 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.
Be creative with your generosity. A charitable-remainder trust can avoid capital gains taxes on appreciated assets, allow you to receive income from life and receive a tax deduction now for a charitable contribution that will be made after your death. A charitable-lead trust can avoid taxes on appreciated assets, earn an immediate tax deduction and still provide an inheritance for your heirs later on. A donor-advised fund can earn you a tax deduction for the full value of appreciated assets now, even though you don't have to determine the recipients of your generosity until later years.
Save for college the tax-smart way. Stashing money in a custodial account can save on taxes. But it can also get you tied up with the expensive "kiddie tax" rules and gives full control of the cash to your child when he or she turns 18 or 21. Using a state-sponsored 529 college savings plan can make earnings completely tax free and lets you keep control over the money. If one child decides not to go to college, you can switch the account to another child or take it back.
Use a Roth IRA to save for college. Sure, the "R" in IRA stands for retirement, but because you can withdraw contributions at any time tax- and penalty-free, the account can serve as a terrific tax-deferred college-savings plan. Say you and your spouse each stash $5,000 in a Roth starting the year a child is born. After 18 years, the dual Roths would hold about $375,000, assuming 8% annual growth. Up to $180,000 -- the total of the contributions -- can be withdrawn tax- and penalty-free and any part of the interest can be withdrawn penalty-free, too, to pay college bills.
Contribute to a Coverdell. Up to $2,000 a year can be contributed to a Coverdell Education Savings Account for any beneficiary. You don't get a deduction, but money you stash in a Coverdell for, say a child or grand child, grows tax-deferred and can be withdrawn tax-free to pay education bills, including elementary and high school expenses. Contributions for 2009 can be made as late as April 15, 2010, but the sooner the money is deposited the sooner earnings are sheltered from taxes.
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of an educational assistance tax-free each year. That means the boss pays the bills but the amount doesn't show up as part of your salary on your W-2. The courses don't even have to be job-related and even graduate-level courses qualify.
Save energy, save taxes. Home improvements designed to save energy can shave your tax bill, too. One tax credit is worth 10% of the cost of new insulation, doors, windows and high-efficiency furnaces water heaters and central air conditions installed in 2009. The maximum credit is $500, with no more than $200 attributable to windows. A bigger credit is available if you install a solar energy system.
Make your IRA contributions sooner rather than later. The sooner your money is in the account, the sooner it begins to earn tax-deferred or, if you use a Roth IRA, tax-free returns.
Convert to a Roth IRA. Switching a traditional IRA to a Roth requires paying tax on the converted amount, but that can be a fabulous tax-saving investment because all future earnings inside the Roth can be tax free in retirement. (Withdrawals from traditional IRAs are taxed in your top tax bracket.)
Reader Comments (0)