5 Tax Deductions to Take This Year

5 Tax Deductions to Take This Year

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:

5 Tax Deductions to Take This Year 1

Photo via Wikimedia Commons

1. Retirement Account

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.)

2. Job Hunt

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”.

3. Child Care

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.

4. Moving

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.

5. Medical

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.

Bonus: Give Yourself a Raise

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.

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5 Tax Deductions to Take This Year 2

12 thoughts on “5 Tax Deductions to Take This Year”

  1. Last sentence of your blog should have been:

    Increase the amount of witholdings to get more money in your paycheck.

    Reducing would lead to more witholding.

  2. No. The withholding for your paycheck is how much money you pay in taxes out of your paycheck. A higher withholding = more money to the government right now, and a lower paycheck. A higher amount withholding can result in a higher tax return down the road, but you have less money now. If you get a tax refund, it means you are paying too much in taxes withheld from your paycheck, and giving the government an interest free loan. If you reduce the amount of money you are having withheld from your paycheck you will see an increase in your regular paycheck, since you will have reduced the amount of money you are having sent to the government right now for an interest free loan.

  3. If you bought by April 30, you can count the home buyer tax credit (if you qualify) toward 2009 or 2010 taxes. But it has expired, with no renewal in the works yet. However, that is a CREDIT, and this post dealt specifically with deductions.

  4. You said “Go to your company’s human resources department and ask for a new W-4.”

    When you ask for a new W-4, you are either increasing or decreasing your withholding allowance. For e.g, if the withholding allowance is 2 and you increase it to 4 then that would mean more money in your paycheck. If you decrease it from 4 to 2 then you allow your employer to deduct more money out of your paycheck.

    I am a tax accountant and I do this for living. The only number that matters on a W-4 form is the number of withholding allowances. 99% of the time that is what decides how much money is withheld from your paycheck.

  5. I see. I was talking about amount of money you are withholding, and not number of exemptions. Last time I filled out a W-4, I put in an amount of money that I wanted withheld on top of number of exemptions I claimed. Thank you for the clarification.

  6. i have confusion hope you can help me on: i file married file jointly – i max out 16500 in company 401K – can i also open traditonal IRA and put 5000 in it?

    also, if i have traditional IRA and contribute 5000 to it, can i also open roth ira and put 5000 more for same yr?

    could you open both traditonal and roth ira for same yr?

  7. If you max out on a 401k, you can open an IRA and put money in it, up to $5,000, maxing it out. However, you can only put in $5,000 for all IRAs. So, while you can split your contributions between a Roth and a traditional, the total you put into all the IRAs in your name is $5,000. One way you can do a little more with an IRA is to have your spouse open one as well. If you are married, your spouse can have an IRA, even if she doesn’t work. Your IRA is considered separate from your spouse’s IRA, so you could put $5,000 into your IRA and $5,000 into your spouse’s.

  8. Hi Miranda,
    My wife just started working and we willmbe filing jointly for 2011. I am Maxing it out on my $16500 401k contribution. Can my wife also get a tax free 401k allowance.
    Can we open Roth accounts and if yes, how much can each ofnus put.
    I am new to thenUS, what is the $5000 each in IRA that you mentioned in your earlier comment on this page. Thanks. Vivek

  9. Your wife can have her own 401k — if it is offered by her work. Or you can look into a solo 401k. It is important to note that these accounts are not tax free. They are tax deferred. You get a tax deduction for them now, but you have to pay taxes on the money later, when you make withdrawals from your account. You might want to consult with a financial professional to make sure you are doing everything by the book. You can put $5,000 into an IRA for you and one for your spouse (totaling $10,000). However, you have to meet income requirements to qualify for a Roth.

  10. Thanks Miranda,
    – So both my wife and I can put $16500 into our 401k’s? Thats good news. I understand that the taxation is at the time of withdrawl.
    – I understand one can contribute to ROTH 401k only if you are below a certain income level .. is that correct?
    – Over and above the 401k and 401k Roths, can we put $5000 in IRA’s. What are the benefits of doing this.
    Cheers, Vivek

  11. The main benefit of putting more IRAs in over and above the 401ks is that you have more money in tax advantaged accounts, as opposed to using a taxable account. It’s generally considered a better idea to max out your tax advantaged investments before putting money in taxable accounts.

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