Knowing what you're entitled to write off on your tax return might seem complex and mysterious, but it doesn't have to be. This year, popular write-offs include deductions for alimony payments, moving expenses (if the move is related to a job relocation or self-employment) and IRA and health savings account contributions. Tax credits include the dependent care credit for child care costs (if you work), education costs (including tuition and fees), retirement contributions to IRAs or 401(k)s and the earned income tax credit for low-income tax payers. Student loan interest can be deducted up to $2,500 annually, and if you itemize deductions, mortgage interest and real estate taxes as well as state and local income taxes or sales taxes can be added to that list.
Ready to dive in deeper? Here are five more easy ways to pay fewer taxes:
1. Check for ordinary losses on stock losers.
Last year was a great year for the stock market, but not every investment was a winner. Ordinarily losses on the sale of stock are deductible as capital losses. These losses can offset capital gains (including capital gain distributions from mutual funds) as well as up to $3,000 of ordinary income ($1,500 for married persons filing separately).
But you may be able to obtain even better tax results if the stock was in your own corporation or another closely held corporation that meets the requirements to be treated as "Section 1244 stock." That means if you invested in your brother-in-law's business that meets the Section 1244 requirements and it failed, causing you to dump the stock for pennies on the dollar or you simply walked away, then you can deduct up to $100,000 of losses as ordinary losses on a joint return ($50,000 for singles). Losses in excess of this dollar limit are treated as capital losses subject to the limits above. (IRS Publication 550 spells out the details of this rule.)
2. Check for worthless securities.
Unfortunately not all investments work out; some corporations -- public or closely held -- go belly up, leaving investors with worthless stock and other securities. If you have a security that's become worthless, you can deduct your loss. %VIRTUAL-article-sponsoredlinks%You're treated as having sold the security on the last day of the year in which it became worthless.
You have seven years from the year in which worthlessness occurred to file a refund claim, so look for securities you owned that became worthless in 2006 or later so you can file a refund claim before April 15, 2014.
Caution: The stock must be completely worthless. The fact that a company declares bankruptcy does not mean its stock is worthless. Remember that Kodak filed for bankruptcy protection in 2012 and all looked hopeless, but Kodak emerged from bankruptcy and its stock was relisted on the New York Stock Exchange in November.
3. Pay no tax on gain from your home sale.
Did you sell your home in 2013? If you owned and used it as your principal residence for two of the five years preceding the date of sale, then you can exclude from income the gain up to $250,000, or $500,000 on a joint return. If you bought your home a long time ago and had a large gain, you may still use this shelter to avoid paying any tax on the sale by correctly figuring your tax basis and gain realized.
Gain is the difference between the amount realized (the selling price less broker's commissions) and your tax basis. Tax basis is the original cost of the home increased by capital improvements you made to it over the year. Capital improvements include a new roof, an addition, fencing, a new alarm system or even new appliances. IRS Publication 523 gives an overview of this rule.
Caution: If you took a home energy tax credit in past years for adding insulation, storm windows, or solar panels, then you must reduce your basis for these capital improvements by the amount of the credit.
4. Deduct your out-of-pocket costs for charity.
If you do volunteer work for a nonprofit organization and itemize your personal deductions, then you can write off the expenses you incur. For example, if you deliver meals on wheels in your car, you can deduct your costs at the rate of 14 cents per mile (provided you have a record of this driving).
If you buy items on behalf of a charity, then you can deduct these costs as long as you correctly substantiate your costs. Receipts aren't enough if the costs are $250 or more. In this case, you need a written acknowledgment from the charity.
Note: You can never deduct the value of your time and effort expended on behalf of a charity. IRS Publication 526 contains more details about the ins and outs of this approach.
5. Make smart tax elections.
The tax law has many elections that allow you to choose the most beneficial way to handle certain tax items. For example, if you suffered a casualty loss in a FEMA-declared disaster in 2013, you can opt to deduct the loss on an amended return for 2012. Or, if you'd get a bigger write-off in 2013 because your adjusted gross income (the threshold for claiming this deduction) is smaller, simply claim your loss on the 2013 return. FEMA disaster declarations are listed at www.fema.gov/disasters. If you sold property on an installment basis, then you can choose to report it all on your 2013 return rather than spreading the gain over the years in which installment payments are received. This choice makes sense if you have losses now to offset the gains.
If you prepare your own return, your tax software should ask questions to help you chose the most favorable option; tax pros should do the same.
Keep in mind that the IRS won't voluntarily send you a refund; you must file a return showing why you're entitled to it. To hold onto more of your hard-earned money, take the time to see what you might be missing by considering the strategies that apply to your own life.
Barbara Weltman is an attorney, advocate for small businesses and entrepreneurs and the publisher of Idea of the Day and the monthly e-newsletter "Big Ideas for Small Business" at www.barbaraweltman.com. You can follow her on Twitter @BarbaraWeltman.
Interest rates are low, but that's no excuse to accept 0.01 percent interest rates on your savings. Just a little shopping can find you many FDIC-insured savings accounts paying as much as 1 percent in interest, usually with no fees and easy availability to your money through electronic funds transfers. Compared to the near-zero rates that uninsured money-market mutual funds and other alternatives pay, high-interest savings accounts are a much safer way to save.
Banks still try to get customers to pay more for less, with one recent threat to charge fees for basic deposit accounts if the Federal Reserve cuts interest rates further. But many online banks not only offer fee-free options on their checking and savings accounts but also pay interest, and many have extensive fee-free ATM networks or reimbursement arrangements. If your bank follows through on threats to raise fees, taking your business elsewhere is your best move.
Bankrate reports that the average credit card charges around 16 percent in interest. That's a guaranteed money-maker for the banks that issue cards, but a big loser for those who carry balances on their cards. With many cards offering promotional interest rates as low as 0 percent, using them to get rid of high-interest cards is a no-brainer move and can help you pay your debt down faster.
Mistakes on your credit history can keep you from getting a loan that you want to buy your next home or car, but they can also have consequences you'd never imagine. Increasingly, insurance companies, apartment rental agents, and even prospective employers order copies of your credit report to see if you're financially responsible. Be sure to take advantage of your free credit check at the government's annualcreditreport.com website to make sure the three big credit-rating agencies have everything right before mistakes come back to bite you.
Payday loans have gotten more tightly regulated recently, but banks and other financial institutions still offer ways to let you get quicker access at your cash -- for a hefty fee. Resorting to short-term money fixes can land you in even more problematic situations down the road, because those solutions often create debt spirals from which it's hard to emerge unscathed. Set up an emergency fund instead and be prepared in advance for the money woes that life throws your way.
Interest rates have risen during the last half of 2013, with a typical 30-year mortgage carrying a 4.5 percent interest rate. But many homeowners still carry higher-interest mortgages from before the financial crisis. Now that home prices have risen, you might be able to refinance for the first time, and many homeowners have used lower rates to cut hundreds from their mortgage payment or shift to a shorter-term 15-year mortgage to pay off their debt faster.
Too many people never update their insurance coverage to deal with changes in their coverage needs, whether it comes from changes in family status for life insurance, health conditions for health-care or long-term care insurance, or even what types of property you own for homeowners' insurance. Don't wait for disaster to strike; check with your insurer or agent to see if your current coverage meets your needs.
In the past, investors had to pay hundreds or even thousands of dollars just to make a simple stock purchase. Now, though, the rise of discount brokers, low-fee index funds and exchange-traded funds, and freely available investment news and advice have made it silly to spend large amounts to get access to the financial markets. If you're still paying your broker too much to invest, look into alternatives that can help you avoid cutting serious money out of your retirement nest egg.
Everyone likes a tax break, and one of the best ones for you to use involves making contributions to a tax-favored retirement account. By putting money in an IRA or 401(k), you can reduce your current taxable income and save on your taxes while also preparing for the future. With 401(k)s, your employer might even chip in a bit on your behalf. Even when times are tough, finding even small amounts to save can put time on your side and make a big difference down the road.
Many investors found out the hard way this year that bonds aren't as safe as they thought, with some major bond funds posting double-digit percentage losses in 2013. Despite those losses, bonds still carry substantial risk in 2014, with many calling for imminent interest-rate hikes that would erode their value further. Even now, bond rates are so low that they don't compensate you much for their risk.
In contrast to bonds, stocks have soared in 2013. That has some investors finally piling into the market for the first time since 2008 and 2009, while others remain shell-shocked from the massive losses they incurred back then during the financial crisis. Even with the Dow Jones Industrials (^DJI) and other major market benchmarks near all-time record highs, it makes sense to have some stock exposure in your portfolio. Just don't go overboard in the false belief that gains of 20 percent and 30 percent will happen every year.
If you pay full price for just about anything these days, you're paying too much. The rise of deep-discount stores has led to falling prices at stores and shopping malls. Moreover, online tools like coupon sites, daily-deal offers, discounted gift cards, and cash-back credit-card deals can cut your costs as well. With all these tools, you won't find many situations in which you have no chance of getting a bargain on the items you want.
In the past, many young adults focused on getting into as strong a college as they could, figuring that their degree would pay them enough to make up for the costs they incurred. With college graduates facing a more challenging job environment than ever, smart students are thinking about college costs before they make a decision on a school. By maximizing financial aid and looking at lower-tuition schools with nearly as strong educational quality, you can avoid creating a big debt hole that you'll struggle with for years into the future.
If you don't have a will, a power of attorney for financial and health-care matters, and an advance directive to tell medical professionals whether you want certain life-preserving measures taken if something happens to you, then you're putting your family at risk. Many people don't have even these basic estate-planning documents, but getting them in place is easier and less expensive than most believe. Get your affairs taken care of in 2014 and save your loved ones some big future hassles.
Resolving to be more financially astute and to avoid common mistakes will help you get your finances in order more quickly. These tips should give you more money to help you meet all your financial goals.