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How to Control Your Taxes
Posted By Jim On 08/23/2011 @ 7:23 am In Taxes | 4 Comments
Over the weekend, there was an article on the homepage of CNN that teased an opinion piece by Lou Zickar on “What taxpayers want.” The teaser said that “In every budget, there is only one item over which a family has no control: what they pay in taxes.”
You and I don’t have total control (who ever has total control of anything in their budget?) but there are plenty of levers we can push and pull in order to adjust your taxes. Here are just a few.
The biggest impact you can have on how much you pay in taxes, with equal if not greater benefits, is by saving for retirement. You don’t have to pay taxes on every dollar you contribute to a 401(k), hence the the term “tax deferred retirement account.” You’ll pay when you take the money out in retirement, but that’s after it has enjoyed years of tax deferred gains (hopefully!). You get this benefit whether your itemize your deductions or claim the standard deduction.
When you rent, your rent goes into the landlord’s pocket and that’s the end of the story. When you buy a home and take out a loan, your money still goes to the banker’s pocket but Uncle Sam cuts you a small check at the end of the year. The interest you pay on your mortgage, assuming you follow a few simple rules, is tax deductible if you itemize your deductions. The rent vs. buy debate  has raged on for eons so it’s up to you to decide whether it’s right for you. (while you’re at it, real estate taxes you pay to your state, city, or local government is also deductible)
If your stock market holdings have fallen lately, you can “harvest capital losses” to help reduce your tax burden. When you buy high and sell low, thus realizing those losses, you can use that loss to offset capital gains. If you don’t have any capital gains, you can take $3,000 of those losses and apply it towards your ordinary income  (with the remainder carrying over to the next year). As long as you don’t run afoul of the wash rule , this is a perfectly legal way to reduce your tax bill.
Finally, charitable donations are a way for you to financially support organizations while trimming your tax bill, should you itemize your deductions. While it seems a little like spending a dollar to save a quarter, remember that the entire dollar will be going to an organization whose work you believe in. It’s more like buying a $1 item for only seventy five cents.
Protip: If you have big stock gains and want to save yourself some capital gains tax, you can donate the stock . You get to deduct the current market value of the shares without paying taxes on the appreciation.
As you can imagine, this post could’ve just been a laundry list of tax deductions and credits but I chose to pick only the few where there was some economic upside to the deduction or credit. For example, saving for retirement was in but the child credit was out (anyone with kids will tell you that you don’t have kids for “economic upside”).
While this isn’t total control (no matter what you do, your income is still subject to the same IRS tax brackets  as everyone else), you aren’t completely out of control.
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 rent vs. buy debate: http://www.bargaineering.com/articles/rent-forever-dont-buy-a-home.html
 $3,000 of those losses and apply it towards your ordinary income: http://www.bargaineering.com/articles/3000-capital-loss-deduction.html
 wash rule: http://www.bargaineering.com/articles/reduce-your-capital-gains-tax-bill-wash-rule.html
 donate the stock: http://www.bargaineering.com/articles/how-to-donate-appreciated-stock.html
 IRS tax brackets: http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html
Thank you for reading!