Since we’re gearing up for tax season, I thought I’d write up an article on tax breaks that I recently ran across. There’s six in all, although we’ll be covering them in pairs…
Some payback for your purchases?
If you live in a state with no wage income tax or you live in a state with very low income taxes but high sales taxes, you might get a bigger break on your federal return than you’re used to.
In 2005, just like in 2004, you can choose to deduct either your state and local tax or your sales tax. This has been a great one for us… Since we’re in a ‘no income tax’ state with a high sales tax, we’ve been able to save a bit extra on our taxes. Also keep in mind that, even if you opt for the sales tax deduction based on the IRS tables, as opposed to saving your receipts, you can still add in certain big ticket items (like cars). We did that in 2004 for our minivan, and we’ll be doing it again when we file our 2005 taxes, as we bought another new car.
Update: The optional sales tax tables are, in fact, still available.
Use your alimony to save for retirement and get a deduction.
If you’re divorced and don’t have a paying job, you may think you’re not allowed to make an IRA contribution, because the rule is you must have earned income to do so. However, alimony received is treated as taxable income on your federal return, so, in fact, you are eligible.
Thankfully, this is something that we don’t have to worry about. But… If you’re divorced (and not working) this information might be of some use to you. Note that if you;re the one paying alimony, you can use it to reduce your gross income.