Tips to Save on Income Taxes | Penny Pinching Hints

Take advantage of deductibles.

Donate old clothes and furniture. You can deduct the wholesale fair market value. Consider donating a large item at the end of the year such as an old computer or car.

Money management costs can be deducted if they are over 2% of your adjusted gross income (AGI). You can deduct tax preparation costs, investment journal subscriptions, safe deposit box fees, brokers’ fees, and charges for calls to your broker.

Medical costs can be deducted if they exceed 7.5% of your AGI. These costs can include many things you might not think about: weight loss programs, eyeglasses, removal of lead paint if you have children, class to stop smoking, acupuncture and chiropractic care, braces. See IRS Publication 502 for a full list.

You can deduct casualty losses that exceed 10% of your AGI if you are a victim of a hurricane or other disaster. You can also withdraw your IRA monies without penalty and have 3 years to pay the tax due on that income. If you help victims of a disaster, you can take mileage deductions for travel, $5000 per person you house for 60 consecutive days, and deductions on gifts made to victims. (Check on other tax benefits for people who live in the areas affected by disasters.)

Prepay loans (student loans or mortgages) in December. You can take the deduction on the present year.

There is a $1,000 tax credit for children under 17. Also, if your AGI is under $110,000 for a couple and under $75,000 for a single parent of a child under 13, you can take a 35% deduction of up to $3,000 for child care costs at home or in day care.

Job search expenses can be deducted, even if you don’t get a job. You can deduct resume preparation costs, travel costs to interviews, and costs for job counseling.

Withhold just enough.

The average refund is $2,000, which amounts to $160 a month. If you had this money in your own pocket you could be earning interest.

Make sure you are withholding the right amount. Check your W-4 withholding amount when you get married, when your have an increase in dependents or children, or when your inertest goes up because of loans or buying a house.

Save on tax preparation.

E-filing is a good idea. You can get your refund back in two weeks and make your money work for you.

Use software for preparing your tax forms and for e-filing on the web. Turbotax.com, Taxcut.com, and Tactact.com all have websites you can use without buying the software.

If your AGI is less than $50,000, you can have free tax preparation at IRS.gov. Some states also offer free tax preparation. Check at Taxadmin.org for a list of states that offer this service.

Educational savings:

There is a credit of $1,500 with the Hope Scholarship Credit for the first two years of a college education for anyone in the family.

The Tax Payer Relief Act of 1997 allows a tax credit per family of 20% of tuition cost up to $1,000 per year.

Other tax-saving strategies:

If you switch jobs, you may have overpaid your Social Security tax. Check your W-2. If more than $5,580 was withheld, claim a credit for overpayment.

Remember investment gains can be offset with capital losses. You can also carry forward losses from last year to this year. Make sure you look at your income tax from last year to see what can be taken as a loss this year.

You can give $10,000 per year, per spouse, to children or heirs without their paying taxes through the gift exclusion.

You can give tax-free up to $1,600 per year to a child under 14. It might be wise to carry that forward after 14 by rolling it into an Education IRA.

Miscellaneous tax savings:

Save on estate taxes by putting the people who will receive inheritance from you as beneficiaries and co-owners on all your accounts. This avoids probate, costs for wills, and even trumps written wills.

Save on sales tax by buying online or buying big items such as cars in states that have no sales tax (Montana, New Hampshire, Oregon, Alaska, and Delaware), although some residents’ states still demand the sales tax.