Personal Income Tax

How to pay less tax?

The rule of thumb is to save all the receipts and keep records of any possible tax event.

 Here is the list of major categories, where these extra saving opportunities are:

• Kids
• House
• Education
• Retirement
• Business 

Children play a great role in saving on taxes! Of course, you will never get back all the money spent, but…your taxable income will be reduced (the more kids you have – the less tax you pay), some portion of daycare and babysitter expenses is deductible, some school expenses might be deductible and Uncle Sam might even pay you Earned Income Credit on top of what your earned. Even if you don’t have children of your own, but care for one or provide support for a close relative or parents you may still qualify for deductions.

House is a tax deduction machine in the beginning of the mortgage life. Real Estate taxes are deductible, interest on the house is deductible, certain house improvements for the elderly and disabled might lower your tax bill. Interest on your home line of equity is generally deductible; so next time, before buying that new car or boat make sure to check how much can be saved on the tax bill by financing this way. Selling the house with profit usually generates tax free income. Also, don’t forget that office for your small business! You might own a timeshare, a second house or a rental property which will generate a good tax reduction as well.

There is one thing with owning a house, though, it does not reduce the tax bill unless you itemize, and keep in mind that the standard deduction is pretty generous as it is. Many realtors are pushing the myth that owning a house dramatically reduces tax liability, the reality is less bright and tax benefits alone are not a good reason to buy. Each situation is different, and in the end, you might be better off by taking a standard deduction. For many people, all the house related tax benefits decreases the bill by only a couple hundred dollars. If you are thinking about buying a house, let me know, we'll go through the numbers and check if renting is more beneficial for you.  

Education: Almost all educational expenses might trigger a reduction of the tax bill; such as buying notepads for elementary and middle school, paying for after class programs, or paying for daycare. Savings for education, if properly classified, are deductible; a college tuition generates a good tax reduction even if you go to school only on a part-time basis. 

Post-secondary education can be either deducted or taken as a credit. There are two types of these credits: Hope and Lifetime. It is important to know which year your classes fall into because the Hope credit provides a generous tax reduction in only the first two years of college and can only be claimed twice per person in their lifetime. Even if you are a Junior, but were a Sophomore in the beginning of the year, you still qualify for a Hope credit. The higher the tuition is, the more beneficial the Lifetime credit becomes. For certain high-income individuals, the only option to benefit from a post-secondary education would be a tuition deduction. 

After you are done with school, a student loan interest is deductible.

Retirement: Saving for retirement provides great current benefits! Your money can grow tax free, your company might double your contributions, and you might significantly reduce your tax bill or don’t pay any income tax at all. Certain individuals might enjoy a unique tax code situation by deducting retirement contributions and taking credit for the same contributions at once! This is the only instance of the double-dipping in the USA tax laws.

Also, you don’t have to wait to use the money till the actual retirement! A regular IRA can be spent on a College tuition or as a down payment on a house; you can borrow money interest-free from 401K or simply set it aside for medical bills and enjoy the same tax benefits as retirement plans. I recommend opening an IRA account with Fidelity or Scottrade, they provide great service and have a good selection of No-load mutual funds. An IRA contribution can be made as late as the tax return deadline, but don’t wait until then; the banks will be overflowing with people opening IRAs at the last minute!

We can even go through some mutual fund options to see what might work for you.

Business: If you don’t have one, think about opening it!
The USA tax code is one of the most generous tax codes in the world and it is really easy to incorporate your business. Having a small business can provide access to numerous deductions not available otherwise. You will have the freedom to do what you want or have extra cash in your pockets. Maybe you even have one already but just don’t know it! Do you resell cars from auctions, help your neighbors fix the plumbing, sell Mary Kay products, breed dogs or babysit? All income generating activities must be reported to the IRS and can qualify for a small business tax treatment. You even can lose money for 2 years out of five and offset the losses with the regular income! Trust me, not so many businesses can generate profit in the first year! Check the business section to learn more.