Warren Buffet once said, “It is the government’s job to get as deep as it can into my pockets. It’s my job to keep them out!”
Buffet, of course, was referring to paying taxes, and it is true. It is your duty as a wise money manager to take every step you can within legal boundaries to minimize your taxable income, and thereby minimize the amount of money you pay to Uncle Sam each year.
Education Credits and Deductions
University is expensive. The average college education, including food and room & board, typically runs over $60,000 for a 4 year degree. Fortunately, current IRS tax code makes it possible to deduct a portion of these expenses each year. Whether you are paying for a child’s education, or paying off college loans, one of these credits may apply:
- American Opportunity Tax Credit
- Lifetime Learning Tax Credit
- Tuition and Fees Deduction
Child Care Credit
The majority of American families pay for some form of child care throughout the year, and it is not cheap. Even cheap daycare rates can costs parents thousands of dollars per year. Under the Child Care Tax Credit, parents are eligible to deduct 20 to 35 percent of qualifying expenses up to $3,000 for one qualifying child, and up to $6,000 for two or more qualifying children.
Gift Money
The government actually taxes you when you give money to friends and family on any amount over $10,000, but that minimum has now been raised to $13,000. This means you can offload some of your assets to children, parents, etc. at a rate of $13k per person, without paying any gift tax at all. This can increase your tax debt relief.
IRA Contribution
One tax shelter is an IRA. When you contribute to an IRA account, that money is subtracted from your taxable income, which results in lower tax payments to the government. Many people do not know, however, that one may actually contribute up to $5,000, depending on your modified gross income, before April 15, 2012, and the contribution will count for tax year 2011. This is a great way to save money last minute.
Mortgage Bill
Here is a little known trick. If you pay your January mortgage before December 31st of the current year each year, you may be able to deduct the interest for your January payment on your 2011 return. Now may be a little too late to do that this year, but keep it in mind for next year.
Green Expenses
If you make improvements to your home, which are environmentally friendly, you may qualify for a tax credit of up to 30 percent of what you paid. Furthermore, it is not only home improvements that may earn you a tax credit. Electric automobiles and some hybrids also qualify for tax credits.
File on Time
This may sound like common sense, but scores of people miss the April 15th tax deadline each year, and this costs money, increasing the financial burden on tax payers. The first step to saving money on your taxes is to make sure you pay on time and in full so that you do not get hit with late penalties and interest.
Consult a Professional
Knowing exactly all the deductions you may qualify for is nearly impossible. Therefore, it may be worth it to hire a CPA, or use a high quality tax software program, such as Turbo Tax, which can provide a number of additional possible tax breaks based on your personal information and financial situation.
Many good points here. Many taxpayers do not realize that there is a separate failure to file penalty. The maximum penalty can be 25% of the amount due if one is really late. So the rule of tax life is: Always file timely even if you cannot even pay 1 cent toward your tax liability.