Around the time I stopped fighting with my parents and began listening to them, my dad imparted some brilliant financial advice. He told me to become a scholar of the tax law. OK, perhaps he didn't use those exact words, but the message was the same: Know the tax law and take every tax deduction to which you are entitled.
This advice stuck with me, and I'm certain it has saved me thousands of dollars.
The Internal Revenue Service website offers excellent resources to help you further understand the following tax deductions and credits. Study the credits particularly well, as those benefits reduce your taxes dollar by dollar. In other words, if you owe $1,000 in taxes and receive a $150 tax credit, your taxes owed decrease to $850. That's an extra $150 in your pocket.
By spending a few hours each year keeping abreast of the tax law, you can save thousands on taxes over the years. In fact, keeping a tax reduction mindset in your everyday life will serve your finances well.
17 Legal Secrets to Reduce Your Tax Bill
17 Legal Secrets to Cutting Your Tax Bill
Retirement account contributions serve two purposes. Most contributions (except the Roth Individual Retirement Account) allow you to deduct from your taxable income the amount paid into the retirement account. This reduces your total taxable income. Further these funds grow tax free until retirement. If you start early, this strategy alone can secure your retirement.
Contribute to a health savings account if you have a high-deductible medical plan. The contributions unused for medical expenses can roll over indefinitely and grow tax-free (similar to the assets in a retirement account).
Reduce vacation costs by deducting the percent of the unreimbursed expenses spent on business from the total costs. This could include airfare and part of hotel bill (proportionate to time spent on business activities).
4. Don't be afraid to take the home office deduction, if you work for yourself or have a side business. This deduction allows you to deduct the percent of your home which is used for your business (on Schedule C, 1040). If the guest bedroom is used exclusively for a home office, and constitutes one-fifth of your apartment's living space, you can deduct one-fifth of rent and utility fees for your home office.
Self-employed individuals (either full-time or part-time) are eligible for scores of tax deductions. A few of those expenses include business related vehicle mileage, shipping, advertising, website fees, percent of home internet charges used for business, professional publications, dues, memberships, business-related travel, office supplies and any expenses incurred in order to run your business.
Self-employed individuals who pay 100 percent of their Social Security taxes owed (at a rate of 15.3 percent) can deduct 50 percent of the taxes paid. You don't even need to itemize to claim this tax deduction.
There is one more big-time deduction for those who are self-employed or have a side business. In 2013, you're eligible for "bonus depreciation" of 50 percent. This means that you can write off 50 percent of the cost of new equipment purchased instead of writing it off over many years.
Unreimbursed vehicle expenses are another frequently overlooked tax break. You can't deduct commuting costs, but if you travel to satellite offices or drive your own vehicle for business and aren't reimbursed, you can deduct mileage costs.
Tax credits are great, because they are deducted from the tax owed. American Opportunity Tax Credit is available for all for years of college. You receive a tax credit on 100 percent of the first $2,000 spent on qualifying college expenses and 25 percent of the next $2,000 for a maximum of $2,500 per student. That's $2,500 deducted from the amount of tax owed (as long as you meet certain income regarding school courses that improve job skills).
The Lifetime Learning Credit is great for adults boosting their education and training. This credit is worth a maximum of $2,000 per year (up to 20 percent of up to $10,000 spent on post-high school education) and helps pay for college and educational expenses that improve your job skills.
The Earned Income Tax Credit lowers the overall tax bill for low and moderate-income working families.
The state sales tax break gives itemizers the chance to either deduct state income or state sales taxes paid. This benefit is great if you live in a state without income taxes.
Investors, when calculating the cost basis after selling a financial asset, should make sure to add in all of the reinvested dividends. That increases the cost basis and reduces your capital gain when you sell the investment.
Charitable deductions are often overlooked. Include payroll deductions (such as the United Way), checks, cash and donations of goods and clothing.
If you are an adult child who is not claimed as a dependent by your parents, here is a possible tax break for you. If your parents pay back your student loans, the IRS assumes the money was given to the child, who then repaid the debt. Thus the young adult child can deduct up to $2,500 of student loan interest paid by their parents.
I remember tallying job hunting costs to deduct from my meager tax bill in the past. If you're looking for a job in the same field, you can deduct all related expenses as miscellaneous expenses if you itemize (and they must pass a 2 percent threshold). You can deduct these expenses even if you didn't find a new job.
Are you in the military reserves, such as the National Guard? If you travel more than 100 miles from home and need to be away overnight, then you can deduct lodging and one half the cost of meals while you are away. Of course, you can also deduct mileage costs as well.
Do not count on a tax preparer to know every deduction for which you are eligible. Be a smart consumer and know the tax benefits you can claim. Every additional deduction you claim increases your disposable income.