Twelve Tips for Minimizing Your Tax Bill
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Want to reduce your taxes? Of course you do. We all do. Well, the latest issue of Money Magazine has a list of 12 ways to reduce your taxes. Here’s a quick rundown along with some thoughts on each.
- Deduct state sales taxes. You have a choice between deducting state income taxes or state sales taxes. Even if you didn’t save receipts, you can use a tabled value from the IRS. And if you had any big ticket purchases (we bought two cars) you can add that on top of the base amount.
- Deduct job hunting expenses. You can deduct expenses related to finding a new job, but only to the extent that they exceed 2% of your AGI. Seems unlikely, but worth keeping in mind. Better: You may be able to deduct unreimbursed moving expenses for a new job 50 miles further from you home that your current job — and this isn’t subject to the 2% AGI rule.
- Relief for supporting adult kids. Full-time students living at home qualify as dependents up to age 24 if they paid for less than half of their own support during the year. Similarly, if you paid for more than half the support of an adult relative in 2012 and their income (excluding Social Security) didn’t exceed $3800, you can claim them as a dependent even if they didn’t live with you.
- Deductions for renting out a room. If you rent out a room in your home you’re entitled to the same sorts of deductions from your rental income as a traditional landlord. You just have to adjust your calculations to account for your personal space as well as common space.
- Save on future taxes with a backdoor Roth. We’ve talked about this before. Even if you’re over the income limit, you can still contribute to a Roth IRA through the so-called back door. It’s a bit of work, but well worth the effort.
- Credits for college. You may be able to claim a tax credit up to $2500 for tuition payments.
- Bunch your medical deductions. Unreimbursed medical expenses are deductible to the extent that they exceed 7.5% of your AGI (increasing to 10% of AGI for those under 65 in 2013). If at all possible, consider bunching medical procedures into a single year to maximize your deduction.
- Home office tax deduction. Starting this year, it will be easier than ever to claim the home office tax deduction. Yes, the IRS has a strict definition of what constitutes a home office, but at least you won’t have to do a bunch of complex math if you qualify. Instead, you can deduct a flat $5/square foot up to $1500.
- Investment taxes. The tax rate on long-term capital gains and qualified dividends is increasing for high income earners. Plus, there will be a new Medicare tax on unearned income. Consider maximizing your retirement accounts offsetting gains with losses.
- Tax breaks for college savings. If you’re using a Coverdell ESA (also known as an education IRA) consider switching to a 529 plan, which might give state income tax breaks. These aren’t available with for Coverdell contributions.
- Charitable contributions. If you’re concerned about future limits on charitable contributions, consider making accelerating your donation by using a donor-advised fund. To this I would add: Also consider bunching your contributions in alternate years to maximize your deductions.
- Avoiding the AMT. There’s not a lot you can do to avoid the AMT, but you can at least minimize some of the costs of certain things that you can no longer deduct under the AMT. For example, state and local taxes. These deductions go disappear when the AMT kicks in so do whatever you can to minimize those state taxes.
Related to that final point, at least Congress has finally seen the light and indexed the AMT to inflation (as part of the fiscal cliff deal) such that a last minute patch won’t be required every. single. year.