Top 10 Ways to Cut Taxes
1. Cut Your Consumer Debt.
Consumer debt is that which is owed for goods that are consumable and/or that do not appreciate in value (e.g. credit card debt, auto loans, etc.). You pay interest on this debt, but it is not deductible. Shifting some consumer debt to other vehicles, such as home equity loans, can help you cut your tax burden. Be cautious, though: you want to consider loan origination costs and points, as well as your ability to pay consistently.
2. Watch for Alternative Minimum Tax (AMT) Liability
If you earn more income than the exemption and utilize many itemized deductions, AMT may be triggered. Essentially, you must calculate your taxes twice, once for regular income tax and once for AMT. You then pay the higher amount. If you use preference items (e.g. private activity bond interest, accelerated depreciation, etc.), consider shifting income and deductions to avoid the AMT.
3. Time Marital Status Changes Strategically
It’s a reality that marriage and divorce have an impact, sometimes quite significant, on your taxes. You may shift to a different tax bracket, face changes in your IRA contribution deductions,, or lose itemized deductions. If you can either accelerate or delay these changes, it may help you cut your taxes.
4. Contribute to a Retirement Plan
This is a great way to reduce your tax burden - and plan for the future. If you are an employee, inquire about company-sponsored 401(k) or other plans; if you are self-employed, ask us about an effective retirement account strategy.
5. Claim Medical Deductions
You may be able to see significant advantages if you claim costs associated to medical care: for example, you may have to make improvements to your home to accommodate for your or a family member’s condition (e.g. widening hallways and installing ramps for those in a wheelchair) that you can deduct
6. Rehab an Old Building
This can be an effective way to reduce taxes and create income down the road. You will receive a credit, and you can invest in partnerships that specialize in rehabilitating old commercial and/or historic structures
7. Leverage Your Second Home
A second or vacation home may entitle you to a tax break if you treat it as a rental property or secondary residence. Ask us about residency requirements; the number of days you use the home matters a great deal
8. Turn Your Hobby Into a Business
If you earn money from a hobby (e.g. you make quilts to sell at craft fairs), you can turn it into a business and write off your expenses. Prove that this activity generates a profit (keep records, maintain a separate bank account), and you can deduct expenses and even losses. The IRS requires you to show a profit in three out of five years; going forward, if you do not, you will have to prove your “profit motivation” to see tax benefits
9. Watch Out for the “Kiddie” Tax
If you have children under age 19 (or 24 for full-time students) check their income. It may be considered unearned income, which, at a certain amount, will be taxed at the highest rate
10. Claim the Child Care Credit
You may qualify for this credit if you pay for child care while you work or attend school. It applies to children under the age of 13.
Fortunately, these ten tips are just the beginning. There are other ways to save on taxes, depending on your specific situation. The first step is having a tax professional analyze your circumstances and help guide you through the complex territory ahead. With guidance, it is possible to cut your taxes.