Minimizing Your Tax Burden

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Given that tax season is upon us, I thought it would be appropriate to list some tips for saving money on taxes. There are obvious ways of course, such as deductions for charitable giving, putting money in a 401(k), etc., but I hope to list some methods which may not be so well known. Of course, I am not a tax advisor, so you should always consult a qualified tax professional for advice, but here are some general concepts you can apply to maximize your refund:

Sell Losing Stocks

If you own stocks that you believe in long-term, but are down a substantial amount for the year, you can sell these stocks and write the loss off your taxes. Thirty days after selling the stock, you can then re-enter your position. The risk here is that if the stock takes off shortly after you sell, you might not be able to get back in at a favorable price. The months of December and January are typically the doldrums for stock markets, so this may be unlikely given past history, but still a risk to be considered.

Earned Income Tax Credit

For those earning less than $50,000, the EITC can offer a credit as high as $6,000. To see if you might qualify for the EITC, see the IRS FAQ here.

Own Rather than Rent

There are many reasons people may want to rent rather than own (for instance, not dealing with the headache of maintaining a home), but for tax purposes, owning real estate is one of the most advantageous things an individual can do. You can write off interest payments on your mortgage, and depending on your situation, you can often write off the cost of repairs, upgrades, or additions.

Make Your Home More Energy Efficient

In addition to saving money on your energy bill, you can often receive tax incentives from federal, state, or local programs by installing certain equipment or making certain changes to your home. The Non-business Energy Property Credit allows homeowners to claim 10% of the price of eligible property, excluding labor and installation costs. The Residential Energy Efficient Property Credit allows homeowners to claim 30% of the cost of alternative energy equipment. For an overview of federal energy tax credits, see here and here.

Deduct Education and Medical Expenses

Almost all medical-related expenses, including insurance premiums, are tax-deductible, although the amount spent will need to be a significant percentage of your income before it makes a dent in your taxes. Additionally, money contributed to a Flexible Spending Account or Health Savings Account (FSA / HSA) is not taxed (similar to a 401(k)). These can be great ways to reduce your out of pocket medical expenses, and many employers offer these as part of their medical coverage options. Education-related expenses such as tuition can be deducted through the American Opportunity Tax Credit.

Deduct Job Hunting Expenses

Expenses incurred while job hunting can be tax-deductible. If you incurred the expenses while searching for a job in your current occupation, and not your first job, then you can deduct items like travel costs (for attending interviews), printing or mailing resumes, etc. For more guidance on deducting job hunting expenses, see here.

Nobody likes taxes, but the reality is that by smartly managing your tax burden, you can effectively increase your net income. Large net worth individuals know this, but people of more moderate means can also realize significant benefits by doing the same. When making financial and investment decisions, you should always consider how your tax burden will be impacted, and while this will rarely turn a bad decision into a good one, it can certainly make a big difference in the returns you realize over time.

Logan Hertz works as a business strategy consultant in Atlanta and freelances as a personal finance expert. If you are interested in clever, easy ways to increase your income and reduce your costs, email him.

© 2015 Logan Hertz – permission to reprint is gladly given, provided the author is given credit

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