Nobody looks forward to tax season and it seems April 15 is
always looming around the corner. We dread the time it takes to sit
down with our accountant shuffling through the previous year’s
receipts.
By Eric Heckman
Nobody looks forward to tax season and it seems April 15 is always looming around the corner. We dread the time it takes to sit down with our accountant shuffling through the previous year’s receipts. And if you file on your own, you’re always hoping to find at least one more deduction. As annoying as taxes may be, it’s never too early to start planning for the year ahead.
By incorporating various tax-reduction techniques throughout the year, you’re likely to end up saving more of your hard-earned money. You’d be amazed at how even the smallest things add up.
The following are ten smart tax saving tips to help you prepare for next year’s tax season.
1. Maximize your retirement plan contributions. You can reduce taxable income in 2005 by maximizing pre-tax contributions to retirement plans such as IRAs, 401(k) and 403(b) plans. Ideally, you should contribute as much as possible, particularly if your employer makes matching contributions. By taking a pass on a matching contribution, you essentially turn down free, tax-deferred money.
2. Consider making annual gifts. You can give away up to $11,000 tax-free per individual. This is wise for retirees who would rather give money to their heirs now instead of leaving it for estate taxes later.
3. Pre-pay your Jan. 1 mortgage payment. A common way to save taxes is by accelerating certain expenses. If you mail your mortgage check on Dec. 31, the interest expense deduction for that month will be recognized that year, even though it’s not paid until the following year.
4. Put your children to work. This may sound somewhat ridiculous, but you can actually save money by having your children on the payroll. If your business isn’t incorporated and if your children are under 18 (and at least seven years old), you don’t have to pay Social Security or other payroll taxes. If you are self-employed, the salary you pay them will also reduce your Social Security tax depending on your net income.
5. Use your Flexible Savings Account. This is a great benefit offered by many employers, which allows employees to pay for medical, dental and child care expenses on a pre-tax basis through a payroll deduction. Because the money is withdrawn tax-free, the expenses are fully deductible even if you don’t itemize.
6. Invest in education. One of the biggest expenses for parents is college tuition. A Section 529 plan is a great tax-saving strategy to help you save money for their education. The earnings on money invested in this plan grow tax-free.
7. Group your medical expenses. You’re able to deduct medical expenses if they exceed 7.5 percent of your adjusted gross income. If you know you’re going to exceed that limit, it would be smart to pre-pay certain medical expenses. For example, you could pay for your child’s orthodontia expenses in December, rather than next year.
8. Donate to charity. Everyone has old clothes and furniture to donate to a good cause. Just remember to always get receipts. If you give money to non-profit organizations, such as the American Cancer Society, it’s possible they may accept credit cards for donations.
9. Invest under your children’s names. Each of your children can earn $800 in investment income and they pay zero taxes on that amount. If your child is under 14 and their investment income exceeds $800, they are then taxed at the child’s tax rate. Under the “kiddie tax,” investment income exceeding $1,600 for 2005 is taxed at the parents’ highest marginal tax rate. When they are 14 and older, income tax is paid at the child’s tax rate, regardless of the amount.
10. Search for all tax credits. There are many types of dollar-for-dollar reductions available, such as income and education credits.
By planning ahead and using some of these tax-saving techniques, you’re likely to end up with a higher refund or lower your tax liability due by April 15. Also remember, you now have the option to claim state and local sales tax instead of state and local income tax when you itemize your deductions. It also makes sense to consult a tax professional who can interpret the various tax laws and potentially help you save even more.
Eric Heckman is president of Heckman Financial & Ins. Services, Inc. You can contact Eric at www.WealthCreator.com or 297-9800.
