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10 Ways to save on Taxes!

By Ratna SharmaMarch 2006

It's that tax time of the year again! So dig out those records of deductible expenses, job relatedexpenses, childcare expenses, medical expenses or medical travel miles, and charitable expenses.Here are 10 ways you can keep extra dollars back in your pocket instead of giving them to UncleSam.

1. Retirement plans offer a huge scope for tax savings. The yearly limits for 401K, 403(b),SIMPLE, SEP, and Keogh plans increase every year. It may be in your best interest to maximizeunder these plans if you are eligible. If you are a business owner, you may want to inquire intoadopting such plans. You not only benefit by saving taxes and saving for your retirement, butyou may also get employers' match.

Deductible Traditional IRA (Individual Retirement Account) is a good alternative for clients whocan claim it. You can put up to $4000 in this account before April 15th 2006 for the tax year2005! Check for the phase out limit for your filing status. If your spouse is non-working and notparticipating in qualified retirement plan you can open a Spousal IRA. The phase out limit forthis is $160,000. This deductible IRA not only reduces taxes and Adjusted Gross Income (AGI),but may put you into a lower tax bracket! If you are not eligible for deductible IRA you may befor a ROTH IRA. Earnings on this are also tax deferred. If your income is less than $50,000 forthose who are married filing jointly (25,000 Single), and you are not a student or dependent youmay be eligible for a saver's credit!

2. If you itemize, you can get medical expense deduction for expenses in excess of 7.5% of AGIunder schedule A. This includes all medical and dental expenses including medical travel,equipment for disabled, home installations for relief from respiratory ailments or for benefit of sick person, and weight loss programs as treatment for a specific disease. There is a long list of deductible medical expenses, so check with your tax practitioner. Also self-employed taxpayersmay deduct 100% of their health insurance premium.

3. If you haven't started 529 college savings plans for your children, do it now. Yourcontributions can grow tax-free and you can take tax-free withdrawals to pay for collegeexpenses, plus may also enjoy a state tax break! You can take Higher education deduction of upto $4,000 ($2,000 at higher income levels), an above-the-line deduction for tuition and relatedexpenses. You can also take up to $1,500 for Hope credit if you have a 1st or 2nd year student incollege for 2005. Do not confuse this credit with Hope scholarship in college. If not eligible, youcan still claim Lifetime learning credit of 20% of qualified higher education expenses up to$10,000. Educator expense of $250 is allowed for teachers in 2005 for classroom suppliespurchased. If you have paid any student loan interest during 2005 you can take a deduction forthat, subject to your AGI.

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4. You can deduct mortgage interest expense on your tax return if you itemize. Specialassessment paid on your property cannot be allowed as mortgage interest deduction, but theinterest paid on special assessment can be deducted as tax. Keep good records. Loan originationfees and seller paid points are usually deductible as mortgage interest. If you are self-employedand use an area of your home regularly and exclusively for business you can deduct a portion of 

mortgage interest, taxes, insurance, utilities, and depreciation for business use of home.

5. If you hold any securities that became worthless during the year, take a deduction for that.Furthermore, the loss is deemed to have been incurred on the last day of the year in which thesecurities became worthless, regardless of when worthlessness actually occurred. For example,let's say a client bought ABC on Oct 15th, 2004. On March 26th, 2005, the stock is consideredwholly worthless. The loss is long term because it is deemed to have been incurred on Dec. 31,2005.

6. Dig out all those business and job related expenses. Take a deduction for unreimbursedvehicle, travel, transportation, meals, entertainment, job search, and other job related expenses.

Keep good records for each separate expense. Incidental expenses such as taxis, telephone calls,etc., may be totalled on a daily basis. Substantiate for entertainment expenses. Self-employedpersons are allowed a deduction for the business portion of their auto loan interest. If a businessuse of home is established, a mileage deduction between home and other job or client's locationcan also be claimed. Legal fee paid for a divorce or estate plan may be deductible if the advice ison tax consequences. Ask the lawyer to clearly indicate how much of the fee is for Tax advice.

Usually people understand that you don't get any deduction for commuting to office. However,there are certain deductions that you can take. Transportation accounts allow employees to saveup to $100 per month for vehicle/transit pass and $195 per month for qualified parking. Theseare $1,200 plus $2,340 per year savings that few clients claim in their tax returns.

7. If you itemize and are not subject to AMT, you can get a deduction for investment relatedexpenses. It includes fees/salary paid to your accountant/employee, legal fees associated withtaxable investments, professional investment advice, subscriptions to investment publications,including newsletter and magazine, safe deposit box used to hold securities, and depreciation forhome computer used for investments.

8. The "clean fuel vehicle deduction" of up to $2,000 is allowed for 2005. In 2006 a new "fueleconomy" and "conservation" credit of up to $3,400 in federal tax savings will become available,and it varies according to different kinds of cars available. Not only is the dollar amount greater,but credits as a dollar-for-dollar reduction in taxes are more valuable than deductions.

9. Taxpayers are allowed to deduct either their sales tax or their state income tax, whichever isgreater, in 2005. If you bought the following big-ticket items that typically charge sales tax--vehicle, motor home or RV, homebuilding materials, or prefabricated home? You might opt forthe sales tax deduction if that exceeds what you owe for state income tax. This is anyway a goodoption for states having no state income tax.

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10. Congress this year has approved two different standard mileage rates for 2005. From1/01/2005 to 8/31/2005, business mileage rate is 40.5 cents per mile, medical is 15 cents permile, moving is 15 cents per mile, and charitable deduction is 14 cents per mile. After 8/31/2005the business rate is 48.5 cents per mile, medical is 22 cents per mile, moving is 22 cents per mile,and charitable mileage is 14 cents per mile.

Copyright A J Solutions, Inc. All rights reserved

Published by Khabar Magazine, Moneywise section March 2006 issue.