Tax Tips (United States)

[Danoff]

I wanted to see what everyone else knows about the US tax code and how people avoid getting killed by taxes. I've learned a few things myself, and can answer a few questions. But I'm hoping to get some intersting ideas from the rest of you. Keep in mind that I'm not a tax attorney, so look up the rules before implementing anything.

Here are a few things I know/use

1) 401k contributions should be maxed out every year as early in your life as possible. It allows you to benefit from compound interest on pre-tax money, and you'll probably be in a lower tax bracket in retirement than you are now, so you can take advantage of deferring your taxes until then.
2) Consider IRAs (same reasoning as above)
3) Own, don't rent. Owning property enables you to deduct mortgage interest from your taxes, reducing the cost of your mortgage. Similarly, you can deduct property tax and get the benefits of real-estate growth in the area
4) You can deduct state income tax, so consider going to the long form if you pay a lot of state income tax
5) Dependent care spending accounts - if your employer offers one, you can use pre-tax dollars to pay for care services for dependents (including daycare)
6) State Municiple Bonds - are double tax free meaning you don't pay federal or state income tax on them. They usually don't return as good a rate, but should be considered for investments if you pay a hefty amount of taxes.
7) Health care spending accounts - if you spend lots on health care each year, it might be worthwhile to open a health care spending account o use pre-tax dollars for health care costs.
8) Donations - Have some junk lying around that a charity might want? You can deduct it from your taxes if you donate it and get a receipt. That might be better than using ebay.
9) Student Loan Interest Paid - deductible, keep track
10) Tuition - Deductible up to a point

Ok, I know there are a lot of teenagers on this site that don't know up from down when it comes to taxes. But I thought maybe some folks would be interested.

 

[TB]

Of the things you have listed that are applicable to us, we do them all. Nice tips for those that aren't aware of them, though.

 

[Danoff]

Of the things you have listed that are applicable to us, we do them all. Nice tips for those that aren't aware of them, though.

What else do you do?

 

[skip0110]

Does anyone else here do 1040-ES?

This is my 2nd year I will be owing taxes and I am doing it this year rather than having withholding from my paycheck.

 

[Danoff]

I have no idea what that is or when you'd use it.

 

[OZZYGT]

I know that If you own a SUV or a hybrid car, you can get more money back.




Ciao!

 

[Mark T]

US taxes looks even more complicated than here in the UK.

 

[skip0110]

I have no idea what that is or when you'd use it.

You pay taxes up to 4 times a year (each quarter) in addition to or instead of paycheck withdrawal.

It helps when your salary is not your primary source of income, for example, in my case I earn a lot from capital gains, which are hard to predict and account for in a withdrawal.

 

[Duke]

You should always open a health care FSA if your employer offers it, no matter what level of health spending you do every year.

Itemizing taxes on your 1040 requires your health expenditures to be about 7% of your income before they become deductible. Almost nobody with normal health costs meets that requirement. However, since the FSA works by withholding/reimbursing you with untaxed dollars, you're effectively making an end run around this requirement since it can be used for as little a couple hundred bucks a year.

 

[Kylehnat]

As usual, danoff brings the good stuff 👍. Unfortunately, I don't earn enough to really stick it to The Man...yet.

1) 401k contributions should be maxed out every year as early in your life as possible. It allows you to benefit from compound interest on pre-tax money, and you'll probably be in a lower tax bracket in retirement than you are now, so you can take advantage of deferring your taxes until then.
2) Consider IRAs (same reasoning as above)

I hear recommendations to put 10-15% of your gross income into a 401(k) or IRA. That scares me. Hey, I need to eat, you know!!! I do put about $100/month into it, so I guess that's a start . Down the road, I'll surely use this tax-evasion method more.

3) Own, don't rent.

As soon as I come up with $350,000 for a 1200 square foot rambler, I'll go for it.

4) You can deduct state income tax, so consider going to the long form if you pay a lot of state income tax

No state income tax in Washington. (Yay?).

5) Dependent care spending accounts - if your employer offers one, you can use pre-tax dollars to pay for care services for dependents (including daycare)

No known dependents.

7) Health care spending accounts - if you spend lots on health care each year, it might be worthwhile to open a health care spending account o use pre-tax dollars for health care costs.

I never get sick or hurt . (Homer Simpson: "Must hurt self. Must hurt self.")

8) Donations - Have some junk lying around that a charity might want? You can deduct it from your taxes if you donate it and get a receipt. That might be better than using ebay.

But I can charge 100% shipping on eBay .

9) Student Loan Interest Paid - deductible, keep track

I somehow made it through college without borrowing any money.

10) Tuition - Deductible up to a point

No more skool for me. I smart now!

Good advice, though. There are tons of ways to soften the blow of federal taxes 👍.

 

[YSSMAN]

...I used to do my own taxes, but after getting some things messed up last year (no major consequences other than a slight error in the IRS' favor), so next time I'm planning to just get them done by someone else. The whole tuition payment and loan thing, I think, is what causes the problems. From what I understand there is some money to be made back there, and if that is the case, that will be very nice.

 

[Omnis]

Corporations!

 

[FoolKiller]

Hey danoff, thanks for the tips.

I know most of them already. The only one I didn't know about was the state income tax.

It is good for someone to point this stuff out. They offered my wife an additional retirement account either through a 401(k) or some other program that was taken out of her net income. They made the second option sound like this great deal and she got all excited about it and everything because she wouldn't be taxed when she took it out. I had to sit her down and draw out the math and show her that by investing from net income instead of pre-tax she was being taxed more now and investing less (because it was based on percentages). I pointed out that she would either have less money now or less money in retirement if she did that.

The fact that they would try and trick her like that didn't surprise me as she works for the state government, so it benefitted them to make their employees invest net income instead of pre-tax.

This stuff is so complicated that no one can understand it all without years of school and a month of refresher/update seminars every year. And the IRS can't figure out why we don't like them.

 

[Danoff]

It is good for someone to point this stuff out. They offered my wife an additional retirement account either through a 401(k) or some other program that was taken out of her net income.

A roth 401(k), or 403b since you say she works for the government?

They made the second option sound like this great deal and she got all excited about it and everything because she wouldn't be taxed when she took it out. I had to sit her down and draw out the math and show her that by investing from net income instead of pre-tax she was being taxed more now and investing less (because it was based on percentages). I pointed out that she would either have less money now or less money in retirement if she did that.

The roth vs. traditional retirement accounts usually break even. For the roth, which is what it sounds like they were offering her, you get to pull the earnings on post-tax dollars out without paying tax. Basically you never pay tax on the roth account. This means you get to take full advantage of compound interest. You get taxed on what amounts to a small portion of your investment (up front) by the time you're 60 (assuming it's doubled a time or two) and you don't pay any taxes in retirement.

In the traditional version you don't pay taxes on the invested money, so you get better returns while it's invested because more went in. In the end, though, you pay taxes on EVERYTHING, including the interest (which as I said before, could be the majority of what's in the account).

The fact that you invested more in the traditional usually balances out against the fact that you don't get taxed on the interest in the roth version.

That being said, if you're in a lower tax bracket now than you expect to be in retirement, the roth wins. If not, the traditional wins.

 

[FoolKiller]

A roth 401(k), or 403b since you say she works for the government?

I wish I could find that email. I want to say that a roth sounds right, but I don't want to confirm anything without being sure. It was some sort of new supplemental retirement offering that she was offered and to make sure I understood it properly I ran it by our HR manager here at work and she suggested staying clear because it would be less beneficial to us in the long run.

And it is state government, so they some times differ from the federal offerings. This new offering was intended as a compensation, along with pay increase, for a mandatory increase in hours from 35-40 a week (imagine that horrible situation ).

 

[Pupik]

Work related expenses: I save every receipt. If you buy clothes or work uniforms (or even have it deducted from your check), it can be tax-deductible. Of course, you have to try to go past your standard dedcution, which hasn't been a problem the past few years for the wife and I, since she's a teacher, and we're always donating stuff.

Don't forget any loses (storm, fire, theft, etc.) you may have suffered. The IRS was quite good to us for last year's damages, since we saved every reciept. Of course, the insurance increase will offset that, but it certianly helps.