Nobody likes paying more taxes than they have to. No matter how you feel about the government in general, chances are that you don’t want to give more to Washington than you absolutely have to.
Seeing as it is already April, it’s a bit too late to do anything about your tax burden for 2009. But, it’s not too late to look ahead and try to arrange your finances to minimize your taxes next year. There’s still plenty of time to get your house in order. Some possible ways to pay less to the Feds next year include:
1) Contributing to a Retirement Fund: One of the easiest ways to cut your tax burden and help ensure a more comfy retirement is to beef up your contributions to a retirement fund. Whether it’s a plan at work like a 401(k) or 403(b) or an Individual Retirement Arrangement (IRA) you open on your own, the amount you contribute will be deductible from your gross income, decreasing your tax burden. If you’re in the 25% tax bracket, for instance, putting $5000 in an IRA will save you $1250 in taxes (and the money will grow tax-free, to boot!)
It’s worth noting that this is how it works with traditional style accounts; with Roth 401(k)s or IRAs, you still have to pay taxes now on the money you invest, but when you withdraw the funds in retirement, they’ll be tax free. Both types of accounts allow your investment to grow without being taxed, so consider carefully your current and expected future financial state to decide which one will be best for you.
2) Look in Municipal Bonds/Bond Funds: As you go through life and your investing career, you’re likely to add bonds to your investment portfolio, for added stability, diversity, and income purposes. If you have money to invest outside of your retirement accounts and want to put some of that money into bonds, look into municipal bonds or bond funds. Municipal bonds (or ‘munis’) are issued by cities and states to fund any number of projects, such as schools and highways.
From a perspective of saving on taxes, munis have an especially useful quality: they are generally not taxed by the federal government, and frequently not by the state or local governments, either (at least if you’re a resident of that particular state). Using them as an investment outside of retirement accounts allows you to save on taxes and help local government get the funds they need. (Investing in munis inside a retirement account is generally counterproductive; the munis are already tax free, so you don’t get a tax benefit, and munis tend to have a lower yield than taxable bonds, decreasing your return.)
3) Consider business deductions: If you run a small business, either as your main source of income or as a side project, you might be able to deduct some of your business expenses. Be wary, though: there are reams of tax laws regarding what you must do to take these deductions (from having the right corporate structure to how and when you can take said deductions), and the wrong move can cost you money in the long run. It’s probably best to consult with an accountant if you’re trying to use your business as source of tax savings; an ounce of preparation can prevent a pound of future tax problems.
4) Consider the deductions and credits available even if you don’t itemize: Even if you don’t take the time to itemize your deductions, there’s still some opportunity for you to save on taxes. Student loan interest payments, job-related moving expenses, and alimony are all deductible, and a variety of credits are available to you, even without plumbing the depth of the tax code. Usually around the end of the year or the beginning of the next, there’s plenty of information to be found about the newest tax deductions or credits and any other changes to the tax code; keep an eye, and there are likely plenty of ways to cut your tax burden legally and ethically.
5) Charitable Contributions: If you are willing and able to itemize your tax deductions, numerous opportunities for tax savings open up. One in particular that’s worth mentioning is the deduction for charitable contributions. If you’re already giving to charity (which is quite likely), particularly if you’re giving a substantial amount, it’s worth looking into to see if your charitable nature can save you some money on your taxes.
6) Keep up with the new tax laws: There’s always changes and tweaks being made to the tax code, some of which mean you’ll pay more, but many allow you even greater deductions and other ways to cut the amount of tax you owe. As mentioned earlier, you don’t need to go reading through every page of every IRS publication to catch the most pertinent changes; they’ll generally be big news in the personal finance media come year end. Just keep an eye on financial blogs and other media, and you should learn what you can and cannot deduct in the coming year.
That’s it; a short crash course in minimizing your tax burden for next year. Keep these suggestions in mind, and when April 15th next rears its head, you’ll be able to smile and laugh about how much of a refund you’re going to get.
