Smart TaxesSmart Taxes

17 ways to reduce your taxes (legally)

By getting to know basic tax regulations and deductions, you can save money over the long term.

By MSN Money staff Mar 17, 2014 12:39PM

By Barbara Friedberg, U.S. News & World Report


U.S. News & World ReportAround 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.


Image: Calculator © Creatas, JupiterImages CorporationThe Internal Revenue Service website offers excellent resources to help you further understand the following tax deductions and credits. Study the credits 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.


1. Retirement account contributions are the top tax-reduction tips as they 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.


2. 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).


3. Combine a vacation with a business trip, and 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. If you work for yourself or have a side business, don't be afraid to take the home office deduction. 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.


5. Those 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.


6. The self-employed individuals who pay 100 percent of their Social Security taxes owed (15.3 percent) can deduct 50 percent of the taxes paid. You don't even need to itemize to claim this tax deduction.


7. 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.


8. 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.


9. Tax credits are gold. 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).


10. 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.


11. The Earned Income Tax Credit lowers the overall tax bill for low and moderate-income working families.


12. 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.


13. Investors, when calculating the cost basis after selling a financial asset, 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.


14. Charitable deductions made with payroll deduction (such as the United Way), checks, cash and donations of goods and clothing are all deductible. These deductions add up and are often overlooked. Don't forget to include the cash you give to the Salvation Army, and the $20 you place in the collection plate at church each week.


15. 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.

16. 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 (they must pass a 2 percent threshold). You can deduct these expenses even if you didn't find a new job.


17. 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.


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9Comments
Mar 17, 2014 1:31PM
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Just a list of more ways that the tax code can be manipulated by select individuals.  The tax code has gotten away from just raising revenue to support government spending necessities to a point where it is modifying behavior, enforcing lifestyle decisions, and rewarding politicians by more terms in office.

 

This has been going on since the implementation of the progressive income tax in 1913 and needs to end.  Why should the government be able to discriminate among individual US citizens in the amount of tax they pay or the services that they receive?  Everyone should be treated equally under the law and this should include the laws that implement our tax policies. 

Mar 17, 2014 2:28PM
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April 15 is coming so B O H I C A ......  :-)
Mar 18, 2014 10:19AM
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Working For Whom?

I think Monday will be my day to work for the leeches signing up for obocare.

Tuesday I'll work for the illegals getting my money from the government.

Wednesday I'll work for all the lazy azzes collecting welfare.

Thursday I'll work for the politicians and governments do nothing workers.

Friday morning I'll work for all the other countries my government is giving my money away too in military protection and foreign welfare.

The first two hours of the afternoon, will pay for all the pigs on food stamps buying soda and junk food.

The next hour will be for all the other taxes I pay and the remainder of the day will be for me, and the state, and the mortgage company…

Mar 18, 2014 10:17AM
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Taxes on wages (in any form – flat or progressive) are the greatest evil of our American Republic. When government is free to steal from you, there are no limits to waste and abuse in government. If a person chooses to work extra hours or two jobs in order to better provide for themselves or their family, they should not be penalized, but that is what happens. The more you make by working harder and longer, the more money is stolen from you, and given to those who spend their lives living off the hard work of others.

The revenue the government needs to provide legitimate constitutional services should be obtained primarily from a national sales tax instead of a tax on wages. All would pay based on consumption, the more you spend the more you pay. The more luxury you surround yourself with, the more you pay. Your choice. A national sales tax system would capture money spent by criminals and by illegal aliens who currently pay near zero in taxes. There would of course need to be exemptions: Cars (already have a federal excise tax) Primary Residence/Rental Properties (vacation homes would be subject to tax/rental profit would be taxed) Fresh Food (Preprocessed foods and prepared meals would be taxed – only fresh/fresh frozen/canned goods would be exempt) Insurance Premiums, Health Care & Certified Education.

Adding another layer of tax to a business would not be fair. Businesses would need to be compensated by keeping a portion of the tax to cover the expense of collection and reporting. A percentage of .20 to .05 would be fair.

Mar 30, 2014 8:14AM
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Live in Michigan?  #1 way to reduce taxes?

DO NOT VOTE FOR REPUBLICANS.

Since elected 2 (governor, Senate) they have:

Enacted a NEW TAX on PENSIONS.

RAISED the state INCOME TAX.

INCREASED many fees (TAX).


Apr 3, 2014 1:35AM
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JOKE,OBAMA WILL NOT STOP LOOP HOLES, BECAUSE HE  AND OTHERS HAVE  AND  WILL USE THEN
Mar 17, 2014 2:14PM
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Another is to open your home to children that need nurturing and claim them as dependents, several methods of getting help while giving help...... Has a lot of satisfying results if you are the right person for the job.
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Obama needs to put a stop to all these loop holes.


We need more revenue and the government knows how to spend money more effectively.

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