The tax year is over, so it’s too late to come up with ways to lower your tax bite. Or is it? Below are six strategies to reduce your taxable income, and all they will take is a closer look at expenses you had during the year, or even to create some now that will lower your tax liability for this new tax year.
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Even if you haven’t made an IRA contribution for 2012, you still have until the April 15 filing deadline to do so. You can contribute up to $5,000 ($6,000 if you are 50 or older) for yourself, or $10,000 ($12,000 if you are 50 or older) for both you and your spouse if neither of you are covered by employer-sponsored retirement plans.
Even if you are covered by an employer plan, if you are single you can still take a full IRA deduction if your modified adjusted gross income is $58,000 or less (phases out gradually up to $68,000). If you are married filing jointly, you can take a full IRA deduction if your modified adjusted gross income is $92,000 or less (phases out gradually up to $112,000).
If you take a $10,000 IRA deduction for both you and your spouse, and your marginal income tax rate is 28% for federal, and 6% for state, you’ll reduce your tax liability by $3,400 with this one step.
Even if you don’t itemize deductions on Schedule A, you can still take a student loan interest deduction on your tax returns. It is considered to be an “above the line” deduction that is taken on page 1 of form 1040 (Line 33 for 2012). And you can take the deduction for yourself or for your qualified dependents.
For 2012, you can take a deduction for up to $2,500 in interest subject to income limits. For single taxpayers, you can deduct the full amount as long as your income does not exceed $60,000 (phases out gradually up to $75,000). For married filing jointly, you can take the maximum up to an income limit of $125,000 (phases out gradually up to $155,000).
This is another potential deduction for non-itemizers. If you qualify, you can complete form 3903 and report the deduction on line 26 of page 1 of your 1040.
In order to deduct moving expenses you must meet three tests (per IRS Publication 521):
Most people know that you can deduct real estate taxes on your primary residence, as well as on a second home. But you can also deduct property taxes on any other property that you own that is not used for business purposes.
For example, you can deduct real estate taxes on a third home that you maintain for your child to be near a college they are attending. You can also deduct taxes on vacant land and many other types of real estate that you own.
In addition to cash contributions, non-cash contributions are also deductible if you itemize. You can generally deduct up to $500 in non-cash contributions, but if you exceed this amount you’ll be required to file form 8283.
Many charitable organizations are now soliciting for the pickup of clothing and other household goods. Donations to these organizations are the kinds of contributions you can deduct.
In order to arrive at a reasonable number to estimate the value of your non-cash contributions, you can use what is called the “thrift shop value”, or approximately what a thrift shop will value your items at. For example, you can generally figure about $5 each for a shirt or a pair of pants. A garbage bag with 10 pairs of pants in it would represent a contribution of $50.
You can deduct expenses that you paid in connection with your job that were not reimbursed by your employer. This includes travel expenses, but it is even more common if you are in sales and need to use your own car to do your job. It could also include marketing and advertising expenses that you pay for certain materials in connection with work.
The catch is that the total amount that you can deduct on Schedule A will be reduced by 2% of your adjusted gross income. If you earn $50,000, that will mean that your unreimbursed employee business expenses are only deductible to the extent they exceed $1,000 (2 percent of $50,000). However if you regularly incur work-related expenses, you can exceed the threshold very easily.
Unreimbursed employee business expenses are calculated on IRS form 2106, and reported on Schedule A, line 21.
When preparing your income taxes it’s important to look any deductions you might have that can reduce your taxable income and result in a lower tax liability.
Have you used any of these deductions in the past? What other deductions have you used?