Tax season just ended. Do you really want to think about taxes already? You do if you are interested in reducing your tax liability and saving money more efficiently. What you do now can result in tax savings when April rolls around again. A tax deduction is an expense that can lower your taxable income, helping to reduce what you owe overall. Here are 5 tax deductions to prepare to take this year:
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If you are more concerned about paying less in taxes now, contribute to a 401(k) or a Traditional IRA (or both, if you have enough). Contributions to these types of accounts come out pre-tax. This means that your taxable income is lowered, so you pay fewer taxes now. If you don’t have a retirement account, open one now, and begin contributing. Make sure you check the contribution limits associated with each account. Realize, though, that your money grows tax-deferred, so when you withdraw from your retirement account in the future, you will have to pay taxes on your withdrawals.
(For those who are more worried about what their taxes will look like later, a Roth account allows your money to grow tax-free with contributions made after you’ve paid taxes. No tax savings now, but they do come later.)
Are you looking for a new job? If so, add up your expenses from mailings, travel, agency fees and resume preparation. What you pay while hunting for a job is tax-deductible, as long as you are looking for a new job in the same field, and your costs are at least 2% of your adjusted gross income. This expense has to be itemized as “Miscellaneous”.
There is a child care tax credit, but it’s not your only option. There is actually a way to use pre-tax money to pay for child care. Check with your employer to see if he or she offers what is known as a child care reimbursement account. Your money comes out before you pay taxes on it, and you don’t have to pay income tax — or Social Security tax — on the amount that you put into the account.
What if you do find a new job? If you have to move to your new job you might be able to deduct your expenses. Your new job has to be at least 50 miles further from your old home than your old job was, though. If this is the case, save your receipts, and keep track of your mileage. You can take a deduction for moving expenses, as well as mileage. You don’t have to itemize this expense; it’s located on the front of Form 1040.
Many employers offer flexible spending accounts that can be used. These health accounts take pre-tax dollars and put them into an account that you can tap into for medical costs, co-pays, medication and other health care related items. You don’t get taxed on the income that you contribute, nor do you pay Social Security tax on it. Be careful, though: these accounts are use-it-or-lose-it each year.
A Health Savings Account — which must be paired with a high deductible health plan — rolls over year to year and can also be used. Contributions to a HSA are above the line deductions.
If you have medical expenses that are not reimbursed, you can deduct these as well, when you itemize. Keep track of your medical costs that are not reimbursed. If they amount to more than 7.5% of your adjusted gross income, you can deduct them. This number goes to 10% under the new health care reform bill, so it will be harder to get this deduction at some point.
If you want a little more money now, rather than waiting until April, consider adjusting your withholding. If you got a tax refund this year, it might mean that you are overpaying. First, account for the Making Work Pay credit (which could be skewing your results), then decide how much each month you should be withholding in order to get closer to your actual tax liability. Go to your company’s human resources department and ask for a new W-4. Reduce the amount of your withholding so that you get a little more money in each paycheck.