As a certified public accountant, Briana Mullenax spends most of her days looking over other people’s financial records to help them keep their accounting straight. One thing Mullenax has discovered in a few years of number-crunching is this: Most of us give away too much of our hard-earned cash.
“It’s really interesting to see people who make three times what most middle-class Americans make pay less on their taxes,” Mullenax says. “They are smart with their money and understand the tax laws… . Most people pay more taxes than they should.”
You have to pay unto Uncle Sam what he’s due, but you shouldn’t be paying more. Though ignorance can be bliss in some cases, when it comes to income taxes, being out of the loop can cost you. If you’ve already put away your calculator and mailed in your return, have no fear. These tips can help you save a boatload on your next federal tax return. (And if you’re a procrastinator who hasn’t filed yet, we have some tips for you too.)
Tip No. 1: Take out a line of credit.
According to Cardweb.com, a company that tracks credit card trends in the United States, only about 16 percent of households pay off their entire credit card bill in full each month. If you’ve racked up a good bit of credit card debt yourself, there’s a two-for-one deal that can help you both escape credit card debt and save on your income taxes.
If you own a home, you can roll your debt into a home equity line of credit. You’ll lower those outrageous interest rates on the plastic, and you’ll be able to deduct the interest on the new loan from your taxes.
“I had some school loan debt, credit card debt, and car debt,” says Jerry Hoffmann, 30, of Atlanta. “Once I bought my house, I got a home equity line and increased it to pay everything off. It works great—but only if you stop all your credit card spending.”
The wise move, then, is to put away the plastic and then pay off the new loan as quickly as possible.
Tip No. 2: Max out your 401(k).
While the money you make on your earnings in a 401(k) retirement plan account is taxed when you pull the money out of the fund, it’s not taxed going into the account. The government allows you to catch up on your tax contributions until the official tax deadline—and if you do so, it can help lower your amount of taxable income.
Plus, beyond the short-term savings, you’ll also wind up better off in the long run. According to Money magazine, “Assuming a 7 percent return and a 50 percent match, upping your annual contribution by one grand and keeping that up for 30 years will fatten your nest egg by $153,110.”
Tip No. 3: Take advantage of pre-tax savings plans.
“Most people fail to take advantage of pre-tax savings,” says Nora Thompson, a senior accountant in Orangeburg, South Carolina “That’s about the best thing you can do to save taxes. It’s money you would probably spend or invest in some other capacity, except now you get to spend it without being taxed.”
The health savings account (HSA) is a goldmine of savings if you know how to use it. When your health benefits don’t help out, your HSA comes to the rescue. Expenses related to doctor visits, specialist care, dental work, eye exams, x-rays, hospital fees, lab fees, crutches, glasses or contacts, and vaccines (among other things) are all reimbursable through this plan. Best of all, it’s a savings plan that accumulates interest for a time when you might need the funds elsewhere—and it’s all tax-free as long as it’s used for qualifying health-care needs.
Tip No. 4: Remember home improvements can pay.
During 2010, consumers may deduct 30 percent from the costs of any home improvements that make their homes more energy efficient—up to $1500. This includes doors, windows, insulation, air circulation fans, hot water heater, furnace, heat pump, and central air conditioning. Learn more about what’s eligible for deductions at energystar.gov.
Tip No. 5: Document everything and itemize.
If you own a home or property and have a monthly mortgage payment, itemizing on your taxes might be the way to save the most money. Standard deductions are great, but there are so many things you can deduct if you’re itemizing, starting with your church-giving. Your tithe and other charitable contributions (including non-cash items) combined with the interest you pay on your mortgage may easily put you on your way to savings—as long as you keep good records.
“Keep documents of where all your money goes,” Mullenax says. “I think that’s where a lot of people go wrong. They forget to keep all their receipts and don’t realize all the deductions waiting for them. Some people don’t do it because they’re afraid they’re going to make a mistake and get audited. But by being more honest on your taxes, you’ll find there are more things you can deduct and therefore get more savings.”
The Internet, as usual, has lots of information to offer. Check out these three Web sites for help and resources: irs.gov—The Internal Revenue Service’s guide to preparing your taxes. Find any and all official forms, ready for printing. 1040.com—This site is great for all things 1040. taxes.about.com—Still have questions? Check out this Web resource for all you’ll ever want to know about your taxes.