Ask a goalgami Expert:Answer

Have a financial question?SUBMIT>



Question:


What can I do to lower my tax bill?
-Jean12


Answer:


You can start by taking as much as you can of each deduction that you’re entitled to. One deductible item in particular that you should make a priority, if it’s available to you, is contributions to an employer retirement plan like a 401(k). That can produce a positive triple whammy: The contributions are from pretax dollars, so your tax bill is reduced by a percentage of the amount you contribute equal to your top marginal federal and state rates; your employer probably will make matching contributions, and you accumulate a nest egg for retirement.
 
You should also take advantage of college saving programs, such as 529 plans and Coverdell accounts, if you’ve got kids who are college bound. The programs offer some of the same tax savings as retirement plans. Don’t overlook the opportunity to write off out-of-pocket education expenses for you or your dependents, either, or to take one of the various tax credits related to education expenditure.
 
Another way to cut your tax bill is to arrange spending on miscellaneous deductible items, such as unreimbursed job expenses, tax preparation fees and safe deposit box rental, so that it is concentrated in a particular year, exceeding the threshold – 2 percent of adjusted gross income – below which the deductions otherwise could not be taken. If your adjusted gross income is $50,000, for instance, you can only write off miscellaneous deductions above $1,000 a year. If that happens to be precisely the amount of deductions you have each year, then you’re out of luck, but if you bunch them together, paying $1,500 one year and $500 the next, say, then you at least get some modest write-off.
 
You should take a similar approach if your total itemized deductions, for mortgage and other interest, charitable donations and so forth, are close to the standard deduction of $5,800 for individuals in 2011 and $11,600 for married couples. Say you’re a couple with $12,000 in deductions a year. If you can bunch them up – accelerating mortgage payments, concentrating donations, making large purchases that incur sales tax – so that your deductions total $16,000 one year and $8,000 the next, for example, you can itemize in the first year and then take the standard deduction, saving more than $1,000 in tax over the course of two years if you’re in the 25 percent bracket.
-Conrad de Aenlle



< BACK