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10 Ways to save on Taxes !

March 2006
10 Ways to save on Taxes !

It's that tax time of the year again! So dig out those records of deductible expenses, job related expenses, childcare expenses, medical expenses or medical travel miles, and charitable expenses. Here are 10 ways you can keep extra dollars back in your pocket instead of giving them to Uncle Sam.

1. Retirement plans offer a huge scope for tax savings. The yearly limits for 401K, 403(b), SIMPLE, SEP, and Keogh plans increase every year. It may be in your best interest to maximize under these plans if you are eligible. If you are a business owner, you may want to inquire into adopting such plans. You not only benefit by saving taxes and saving for your retirement, but you may also get employers' match.

������ Deductible Traditional IRA (Individual Retirement Account) is a good alternative for clients who can claim it. You can put up to $4000 in this account before April 15th 2006 for the tax year 2005! Check for the phaseout limit for your filing status. If your spouse is non-working and not participating in qualified retirement plan you can open a Spousal IRA. The phaseout limit for this is $160,000. This deductible IRA not only reduces taxes and Adjusted Gross Income (AGI), but may put you into a lower tax bracket! If you are not eligible for deductible IRA you may be for a ROTH IRA. Earnings on this are also tax deferred. If your income is less than $50,000 for those who are married filing jointly (25,000 Single), and you are not a student or dependent you may be eligible for a saver's credit!

2. If you itemize, you can get medical expense deduction for expenses in excess of 7.5% of AGI under schedule A. This includes all medical and dental expenses including medical travel, equipment for disabled, home installations for relief from respiratory ailments or for benefit of sick person, and weight loss programs as treatment for a specific disease. There is a long list of deductible medical expenses, so check with your tax practitioner. Also self-employed taxpayers may deduct 100% of their health insurance premium.

3. If you haven't started 529 college savings plans for your children, do it now. Your contributions can grow tax-free and you can take tax-free withdrawals to pay for college expenses, plus may also enjoy a state tax break! You can take Higher education deduction of up to $4,000 ($2,000 at higher income levels), an above-the-line deduction for tuition and related expenses. You can also take up to $1,500 for Hope credit if you have a 1st or 2nd year student in college for 2005. Do not confuse this credit with Hope scholarship in college. If not eligible, you can still claim Lifetime learning credit of 20% of qualified higher education expenses up to $10,000. Educator expense of $250 is allowed for teachers in 2005 for classroom supplies purchased. If you have paid any student loan interest during 2005 you can take a deduction for that, subject to your AGI.

4. You can deduct mortgage interest expense on your tax return if you itemize. Special assessment paid on your property cannot be allowed as mortgage interest deduction, but the interest paid on special assessment can be deducted as tax. Keep good records. Loan origination fees and seller paid points are usually deductible as mortgage interest. If you are self-employed and use an area of your home regularly and exclusively for business you can deduct a portion of mortgage interest, taxes, insurance, utilities, and depreciation for business use of home.

5. If you hold any securities that became worthless during the year, take a deduction for that. Furthermore, the loss is deemed to have been incurred on the last day of the year in which the securities became worthless, regardless of when worthlessness actually occurred. For example, let's say a client bought ABC on Oct 15th, 2004. On March 26th, 2005, the stock is considered wholly worthless. The loss is long term because it is deemed to have been incurred on Dec. 31, 2005.

6. Dig out all those business and job related expenses. Take a deduction for unreimbursed vehicle, travel, transportation, meals, entertainment, job search, and other job related expenses. Keep good records for each separate expense. Incidental expenses such as taxis, telephone calls, etc., may be totaled on a daily basis. Substantiate for entertainment expenses. Self-employed persons are allowed a deduction for the business portion of their auto loan interest. If a business use of home is established, a mileage deduction between home and other job or client's location can also be claimed. Legal fee paid for a divorce or estate plan may be deductible if the advice is on tax consequences. Ask the lawyer to clearly indicate how much of the fee is for Tax advice.

Usually people understand that you don't get any deduction for commuting to office. However, there are certain deductions that you can take. Transportation accounts allow employees to save up to $100 per month for vehicle/transit pass and $195 per month for qualified parking. These are $1,200 plus $2,340 per year savings that few clients claim in their tax returns.

7. If you itemize and are not subject to AMT, you can get a deduction for investment related expenses. It includes fees/salary paid to your accountant/employee, legal fees associated with taxable investments, professional investment advice, subscriptions to investment publications, including newsletter and magazine, safe deposit box used to hold securities, and depreciation for home computer used for investments.

8. The "clean fuel vehicle deduction" of up to $2,000 is allowed for 2005. In 2006 a new "fuel economy" and "conservation" credit of up to $3,400 in federal tax savings will become available, and it varies according to different kinds of cars available. Not only is the dollar amount greater, but credits as a dollar-for-dollar reduction in taxes are more valuable than deductions.

9. Taxpayers are allowed to deduct either their sales tax or their state income tax, whichever is greater, in 2005. If you bought the following big-ticket items that typically charge sales tax--vehicle, motor home or RV, homebuilding materials, or prefabricated home?you might opt for the sales tax deduction if that exceeds what you owe for state income tax. This is anyway a good option for states having no state income tax.

10. Congress this year has approved two different standard mileage rates for 2005. From 1/01/2005 to 8/31/2005, business mileage rate is 40.5 cents per mile, medical is 15 cents per mile, moving is 15 cents per mile, and charitable deduction is 14 cents per mile. After 8/31/2005 the business rate is 48.5 cents per mile, medical is 22 cents per mile, moving is 22 cents per mile, and charitable mileage is 14 cents per mile.

By Ratna Sharma

Copyright � A J Solutions, Inc. All rights reserved

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