The amount of taxes we pay each year is high. Everywhere we turn, the income we earn, the property we own, the merchandise we purchase, the services we pay for, etc., are taxed. We don't have much control of the amount of taxes we pay except for the income tax paid to the IRS each year. Deducting many of your everyday expenses can reduce the income taxes paid. The deductions can then be itemized on your yearly tax return. The purpose of the income tax forms are to document the amount of money you owe the government. Although, the government provides a number of loopholes and opportunities to reduce the amount of income tax paid by itemizing your deductions. Many people use the 1040EZ income tax form because it is easy, but the form does not allow for any itemized deductions to be claimed, simply the standard income deduction. Many people don't realize they may have enough deductions to itemize their income tax return to reduce their taxable income. Refer to the IRS Publications at http://www.irs.gov for detailed information. The following are several examples of ways to reduce your taxes and to itemized deductions:
Contributions to a 401(k) program offered by many employers provide for a reduction in the taxable income earned along with allowing you an opportunity to build a retirement nest egg.
Deductions can be itemized for the interest paid on a mortgage, property tax, state and local income tax, real estate/property tax, charitable contributions, certain home improvements, employment expenses, medical expenses, home based businesses, and much more.
Charitable contributions can include monetary and non-monetary contributions. Consider donating items you would normally throwaway because someone else may be interested in using them. The non-monetary contributions must be based on the fair market value, not the price the item was purchased (unless unused and in perfect condition). Refer to IRS Publication 561 - Determining the Value of Donated Property for further information to help determine the fair market price of items.
Items that have appreciated in value probably should not be sold for the purpose of making a cash charitable donation. The reason is because taxes must be paid on the increase in value which lowers the realized gain from the charitable deduction. Instead, donate the item claiming the value of the item on your taxes. For example: A piece of jewelry originally purchased for $1,000 is now worth $2,000. If the jewelry were sold for $2,000, the $1,000 must be declared as a gain on your tax return which results in a tax payment of $280 (assuming a 28% tax bracket). The donation of $2,000 cash could result in a tax refund of $560. Although, since taxes were paid on the gain, the realized benefit is $280 ($560 received - $280 paid). If the $2,000 piece of jewelry were donated, then the realized benefit would be a tax refund of $560. The result could thus result in receiving an extra $280 refund.
The expenses incurred as a result of participating in a charitable contribution/event are deductible. The expenses include food, clothes, parking fees, tolls, and mileage to/from the event. Refer to IRS Publication 526 - Charitable Contributions for further information.
Improvements and repairs to a primary residence are not tax deductible unless for medical purposes such as modifying a home to be wheelchair accessible. Although, the improvements are considered an increase in value which can be excluded as a gain due to the sale of a home. A disadvantage for making an improvement is that the property taxes may increase because the property value has increased. Improvements to a rental property are deductible. Although, repairs are not deductible unless part of a major renovation to the property, but they can referred to as a business expense.
Losses to a home as a result of theft, casualties, and disasters are deductible if not reimbursed (such as an insurance company). Refer to IRS Publication 547 - Casualties, Disasters, and Thefts for further information.
Start a home based business. Supplies and expenses associated with the business can be deducted and in some cases a portion of your home can be deducted when used as an office. Refer to IRS Publication 587 - Business Use of Your Home for further information.
Medical expenses greater than 7.5% of your Adjusted Gross Income for the year can be deducted from your income taxes. Refer to the Lowering your medical and childcare costs section in this chapter for details.
If you won't have enough deductions to exceed the standard deduction established by the IRS, then try to wait until the following year for those deductions to occur. You will then be able to realize a greater benefit from the deduction next year as opposed to loosing the deduction for this year. For instance, don't make a charitable donation or start a home business at the end of the year, instead what until the next year.
Ensure all receipts for deductions are saved and ensure all records are accurate and updated throughout the year. The organized information will allow you to prepare your tax return quickly and efficiently along with providing the information quickly to the IRS if requested. Always check with the IRS or consult a tax professional for clarification and details pertaining to your deductions. The laws can be beneficial, but they may have specific stipulations to be adhered to before a deduction can be claimed. A lot of information can be obtained from IRS Publications by contacting the IRS at http://www.irs.gov.
The IRS allows for individuals to receive gifts up to $10,000 from an individual per year tax-free. Any amount greater than $10,000 is taxed according to your current tax bracket. Therefore, if you know about a large gift beforehand, request to be given only $10,000 in one year to prevent the need to pay taxes on the amount of the gift greater than $10,000. Therefore, wait until January of the next year to receive another gift up to $10,000 tax-free. Refer to IRS Publication 950 - Introduction to Estate and Gift Taxes for further information.
Return to Taxes Topics.