These tax saving tips are courtesy of TurboTax - they come up once you have finished filing your taxes. There are some very good tips in here - so I decided to post them.
YOUR HOME
Whether you're a seasoned real estate investor or thinking about buying your first home, we have money-saving tips for you:
Homeowner's bible. Be a packrat with paperwork. Some costs associated with buying a new home affect your tax basis, the amount from which you'll figure your profit when you sell. You can deduct other costs in the year of the purchase, including any points you pay (or the seller pays for you) to get a mortgage and any property taxes paid by the seller in advance for time you actually own the home. Keep paperwork on home improvements, too.
Use your IRA to save for your first home. Sure, the R in IRA stands for retirement, but an IRA can be a powerful tool when you're saving for a home. Up to $10,000 can be withdrawn penalty-free for the purchase of your first home.
Don't underestimate the cost of home-equity debt. Generally, interest on up to $100,000 of debt secured by your home can be deducted, no matter what you use the money for. But if you are among the growing number of taxpayers who pay the alternative minimum tax (AMT), home-equity debt is only deductible if the loan was used to buy or improve your home.
Stay actively involved in rental real estate. Anti-tax-shelter legislation can prevent losses from real estate investments from being deducted against other kinds of income. However, if you are actively involved in a rental activity, you can deduct up to $25,000 of such losses, if your adjusted gross income is less than $100,000. You don't have to mow grass and unclog toilets to qualify as actively involved, but you should make sure you're involved in setting rents and approving tenants and management firms.
Take advantage of tax-free rental income. You may not think of yourself as a landlord, but if you live in an area that hosts an event that draws a crowd, such as the Super Bowl or a major golf tournament, renting out your home temporarily could make you a bundle, tax-free. A special provision in the law lets you rent out your home for up to 14 days a year without having to report a dime of the money you receive as income.
Convert a vacation home to your principal residence. It's perfectly legal to sell your home of two years, claim tax-free profit up to $250,000, and then move into a vacation property. After you have lived in that home for two years, you can sell and claim tax-free profit up to $250,000, including any increase in value from the days it was a vacation home. It is $500,000 for married couples.
Second homes can offer a vacation from taxes. If you're trying to decide whether you can afford a second home, remember that you'll get some help from the IRS. Mortgage interest on a loan to buy a second home is deductible, just as it is for the mortgage on your principal residence. Interest on up to $1.1 million of first- and second-home debt can be deducted. Property taxes can be written off, too. Things get more complicated - and perhaps more lucrative - if you rent out the place part of the year to help cover the bills.
Save energy, save taxes. Home improvements designed to save energy can reduce your tax bill, too. There is a tax credit worth 10% of the cost of new insulation, doors, windows, and high-efficiency furnaces, water heaters, and central air conditioning. The maximum credit is $500, with no more than $200 attributable to windows. A bigger credit is available if you install a solar energy system. These tax breaks are set to disappear after 2007.
MARRIAGE
Tying the knot can save you cash. Here are a couple of things for the newlyweds to consider:
Time your wedding. If you're planning a wedding near the end of the year, put the romance aside for a moment to consider the tax consequences. Tax law still includes a marriage penalty that forces some pairs to pay more combined tax as a married couple than as singles. For others, tying the knot saves on taxes. Consider whether it's in your best interest to have a December or January ceremony.
A tax shuffle for newlyweds: Whether you have one job between you or two or more, revise withholding at work to reflect the tax bill you'll owe as a couple. There's still a marriage tax penalty for some couples, but most couples get a marriage tax bonus and pay less than if they were single.
KIDS AND FAMILY
Oh, the joys of parenthood. Here are some money-savers for battle-worn parents and rookie moms and dads alike:
Pay child-care bills with pre-tax dollars. After taxes, it can easily take $7,500 or more of salary to pay $5,000 worth of child care expenses. But, if you use a child-care reimbursement account at work to pay those bills, you get to use pre-tax dollars. That can save you one-third or more of the cost, since you avoid both income and Social Security taxes. If your boss offers such a plan, take advantage of it.
Make the most of a child-care reimbursement account. If Mom and Dad both work and have access to a flex plan, it's worth more to a spouse whose salary is still subject to Social Security tax than to one who has earned enough to stop paying Social Security tax for the year. Money you run through a reimbursement plan avoids the Social Security tax, as well as the income tax. That saves an extra 6.2% for those still subject to Social Security tax. The maximum wage subject to Social Security tax is $97,500 for 2007.
Deduct interest paid by Mom and Dad. Until recently, parents had a good reason not to help their kids pay off student loans. If the parents were not liable for the debt, then no one got to deduct the interest. Now it's treated as if the parents gave the money to the debtor (who then paid it toward the loan) instead of the loan company. The child can take the tax deduction as long as the parents can't claim him or her as a dependent.
Save for college the tax-smart way. Stashing money in a custodial account can save on taxes. But it can also get you tied up with the expensive kiddie tax and gives full control of the cash to your child when he or she turns 18 or 21. Using a state-sponsored 529 college savings plan can make earnings completely tax free and lets you keep control over the money. If one child decides not to go to college, you can switch the account to another child or take it back.
Contribute to a Coverdell. You can contribute up to $2,000 a year per student to a Coverdell Education Savings Account. You don't get a deduction, but money you stash in a Coverdell for, say, a child or grandchild grows tax deferred and can be withdrawn tax free to pay education bills, including elementary and high school expenses. The Contributions for 2007 can be made as late as April 15, 2008, but the sooner the money is deposited the sooner earnings are sheltered from taxes.
Minimize the bite of the kiddie tax. The rule that taxes a child's income at the parents' rate now covers children up to age 18. You can minimize the damage by steering a child's investments into tax-free municipal bonds or growth stocks that won't be sold until the child turns 18.
Tally adoption expenses. Thousands of dollars of expenses incurred in connection with adopting a child can be recouped via a tax credit, so it pays to keep careful records. You may be able to deduct as much as $11,390 for 2007, and $11,650 for 2008. If you adopt a child with special needs, you get the maximum credit even if you spend less.
NEW JOB
Nailing a new job is difficult enough. Fortunately, with TurboTax it's easy to report your new income and save a few bucks along the way. Here are a few tips to keep in mind:
Tally your job-hunting expenses. As long as you're looking for a new position in the same line of work, you can deduct job-hunting costs, including travel expenses such as food, lodging and transportation, if your search takes you away from home overnight.
Keep track of the costs for a job-related move. If the new job is at least 50 miles farther from your old home than your old job was, you can deduct the cost of the move even if you don't itemize expenses. If it's your first job, the mileage test is met if the new job is at least 50 miles away from your old home. If you move after getting married, and either you or your new spouse has a job at the new location, you can deduct the cost of moving yourselves and your belongings (including all those wedding presents).
CHARITABLE CONTRIBUTIONS
Help your favorite charities and improve your tax picture with these tips:
Put away your checkbook. If you plan to make a significant gift to charity in 2007, consider giving appreciated stocks or mutual fund shares that you've owned for more than one year instead of cash. Doing so supercharges the saving power of your generosity. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, and you never have to pay tax on the profit.
Be creative with your generosity. A charitable-remainder trust can avoid capital gains taxes on appreciated assets, allowing you to receive a tax deduction now for a charitable contribution made after your death. A charitable-lead trust can help you avoid taxes on appreciated assets, earn an immediate tax deduction, and still provide an inheritance for your heirs later on. A donor-advised fund can earn you a deduction for the full value of appreciated assets now, even though you won't have to determine who will benefit from your generosity until later
Tote up out-of-pocket costs of doing good. Keep track of what you spend while doing charitable work. This can include what you spend on stamps for a fundraiser, the cost of ingredients for casseroles you make for the homeless, or the number of miles you drive your car for charity. Add such costs to your cash contributions when figuring your charitable contribution deduction.
INVESTING
You need a break now and then, but we can help keep your money working year-round. Rest assured that TurboTax can handle your investment situation, from purchase to portfolio:
Make your IRA contributions now, not later. The sooner your money is in the account, the sooner it begins to earn tax-deferred or, if you use a Roth IRA, tax-free returns.
Avoid the wash-sale rule. If you sell a stock, bond, or mutual fund for a loss, and then buy back the identical security within 30 days, you can't claim the loss on your tax return. The IRS considers the transaction a wash, since your economic situation really hasn't changed. It's easy to avoid being stung by the wash-sale rule, though. Watch the calendar, or buy similar but not identical securities.
Think twice about selling stock for a profit if you're subject to AMT. Although long-term capital gains benefit from the same 15% maximum rate under both the regular tax rules and the alternative minimum tax, a capital gain can effectively cost more than 15% in AMT-land. The special AMT exemption is phased out as income rises. For example, a $1,000 capital gain can wipe out $250 of the exemption, effectively exposing $1,250 to tax. This means your tax bill rises by more than $150 for that $1,000 gain.
Don't buy a tax bill. Before you invest in a mutual fund near the end of the year, check to see when the fund will distribute dividends. On that day, the value of shares will fall by the amount paid out. Buy just before the payout and the dividend will effectively rebate part of your purchase price, but you'll owe tax on the amount. Buy after the payout and you'll get a lower price, and no tax bill.
Check the calendar before you sell. You must own an investment for more than one year for profit to qualify as a long-term gain and enjoy preferential tax rates. The holding period starts on the day after you buy a stock, mutual fund, or other asset and ends on the day you sell it.
Keep a running tally of your basis. For assets you buy, your tax basis is basically how much you have invested. It's the amount from which gain or loss is figured when you sell. If you use dividends to purchase additional shares, each purchase adds to your basis. If a stock splits or you receive a return-of-capital distribution, your basis changes. Be sure to keep all your paperwork in a safe place - only by carefully tracking your basis can you protect yourself from overpaying taxes on your profits when you sell.
Mind your portfolio for tax savings. Investors have significant control over their tax liability. As you near the end of the year, tote up gains and losses on sales to date and review your portfolio for paper gains and losses. If you have a net loss so far, you have an opportunity to take some tax-free profit. Alternatively, a net profit on previous sales can be offset by taking losses on sales before the end of the year.
Tell your broker which shares to sell. Doing so gives you more control over the tax consequences when you sell stock. If you fail to specifically identify the shares to be sold, the tax law's FIFO (first-in-first-out) rule comes into play and the shares you've owned the longest (and perhaps the ones with the biggest gain) are considered to be sold. With mutual funds, an average basis can be used when determining gain or loss, but that alternative isn't available for stocks.
RETIREMENT
You've worked hard. Now it's time your money started working for you. We can help:
Protect your heirs. Make sure beneficiary designations for your IRAs are up to date. If your IRA goes to your estate rather than a designated beneficiary, unfavorable withdrawal rules could cost your heirs dearly.
Time claiming social security benefits. If you stop working, you can claim benefits as early as age 62. But each year you delay - until age 70 - promises higher benefits for the rest of your life. And, delaying benefits means postponing the time you'll owe tax on them.
Dodge a 50% tax penalty. Taxpayers over age 70½ are required to take minimum withdrawals from their IRAs each year. Failing to do so subjects them to one of the toughest penalties in tax law: The IRS claims 50% of the amount that should have come out of the account. Contact your IRA sponsor to pinpoint the minimum required payout to avoid penalties.
Fund an IRA for your child or grandchild. As soon as a child has income from a job - such as babysitting, a paper route, working retail - he or she can have an IRA. The child's own money doesn't have to be used to fund the account (fat chance that it would). Instead, a generous parent or grandparent can provide the funds, or perhaps match the child's contributions dollar for dollar. Long-term, tax-free growth can be remarkable. Just make sure that whatever income a child earns is reported on the child's tax return.
Give it away. Money you give away during your lifetime won't be in your estate to be taxed at your death. That's one reason there's also a federal gift tax. However, the law allows you to give up to $12,000 ($24,000 with your spouse) to any number of people each year without worrying about the gift tax. For example, you and your spouse can reduce your estate $48,000 each year by giving $24,000 to your two children.
MEDICAL AND HEALTHCARE
A few quick changes and some long-term planning can help you stay healthy, physically and fiscally:
Go for a healthy tax break. Be aggressive if your employer offers a medical reimbursement account, sometimes called a flex plan. These plans let you divert part of your salary to an account which you can then tap to pay medical bills. Plan this carefully as money left in the account after your medical bills have been paid, will be forfeited. The advantage? You avoid both income and Social Security tax on the money, which can save you 20% to 35% or more compared with spending after-tax money.
Add in the value of deducting long-term care premiums. As you shop for long-term care insurance, remember that a portion of the cost is deductible. The older you are, the more you can write off. For employees, this is a medical expense, which means it only saves money if your medical expenses exceed 7.5% of your adjusted gross income. If you're self-employed, you avoid the 7.5% limitation and get this deduction even if you don't itemize.
Keep careful records of the cost of medically necessary improvements. You might be able to deduct some of the costs associated with medically necessary improvements to your home or vehicle. These improvements - such as adding a wheelchair ramp, lowering counters, widening a doorway, or installing hand controls for a car - can increase the value of your home or vehicle. The difference between the increased value and the cost is considered a medical expense.
Include travel expenses in medical deductions. In addition to the cost of getting to and from the doctor, you can deduct up to $50 a night for lodging if seeking medical care requires you to be away from home overnight. You can include lodging for a person traveling with the person seeking care. The $50 is per person, so if you travel with a sick child to get medical care, you can deduct $100 a day. As with other medical expenses, you get a tax benefit only to the extent your expenses exceed 7.5% of your adjusted gross income.
MORE WAYS TO SAVE
Check out these valuable tips to fatten your pocketbook:
Buy a hybrid. You can drive away with a tax credit if you buy a gasoline/electric hybrid car in 2008. The size of the credit depends on how fuel-stingy your new car is, but the tax savings can range from $250 to more than $2,000. Buy early since the tax credit is reduced after the manufacturer sells its 60,000th vehicle.
Give yourself a raise. The odds are high that you're having too much tax taken out of your paycheck every payday. The evidence is clear: If you have a big refund coming, too much is coming out of your paycheck. About 90 million of the returns filed in the U.S. last year called for refunds averaging more than $2,200. That's almost $200 each month. Filing a new W-4 with your employer (get one from your payroll office) will ensure you get more of your money when you earn it.
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of tax-free educational assistance each year. That means the boss pays the bills, but the amount doesn't show up as part of your salary on your W-2. The courses don't have to be job-related and even graduate-level courses qualify.
Don't be afraid of home-office rules. If you use part of your home regularly and exclusively for your job, you may be able to deduct some costs as home-office expenses, including part of your utility bills, insurance premiums, and maintenance costs.
Pay estimated taxes ... or not. If you receive significant income not subject to withholding - from self-employment or investments, for example - you probably need to make quarterly estimated tax payments to avoid an IRS penalty. However, if withholding will equal 100% of your 2007 income tax bill (or 110% if your income was more than $150,000), you don't need to make estimated payments, no matter how much extra income you make this year. For more help, check out TurboTax Estimated Taxes at www.turbotax.com.
The above article was taken from TurboTax.com
Other TurboTax articles:
Top 10 tax saving tips:
http://turbotax.intuit.com/tax-tools/top_10_year_end_tax_tips/article
Ten Tax Tips for After January 1, 2008
http://turbotax.intuit.com/tax-tools/ten_tax_tips_for_after_the_new_year/article
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