Personal Finance, Taxes 

Six Great Tax Breaks

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CNN has a list of six great tax breaks you might be eligible for so give these a gander:

#1 Sales Tax Deduction – You have a choice this year of deducting your state and local taxes from your federal return or deducting the general sales tax you paid last year on your federal return. This is a no-brainer for folks who have no state taxes (nine states apply) and for anyone who made large purchases. I explain this in “Tax Relief 101 – Deducting State Sales Tax (vs. State Income Tax).”

#2 Alimony is Income – Alimony is treated as taxable income so if you received any, you can use it to fund retirement accounts like a Roth IRA. If you’ve paid out alimony, then that amount will reduce your tax burden.

#3 Saver’s Credit – If you don’t make a lot (under $25,000, $50k for married couples) then you get a tax credit of up to $2,000 for any savings you put into a retirement plan. If you want to learn more about this, I discussed this in greater detail in “Tax Relief 101 – Retirement Savings Credit.”

#4 Make The Most of Losses – If you had a total stock loss in 2005, then you don’t need gains to offset it because you can deduct up to $3,000 from your regular income! For tax purposes, the stock is considered sold on Dec. 31st, 2005.

#5 Move As Much As You Can “Above The Line.” – Above the line deductions reduce your gross income and adjusted gross income (AGI). Most below the line deduction eligibility is tied to your AGI so the more Above The Line deductions you have, the more below the line deductions you’ll be eligible for. business expenses are above the line deductions so if you have a side business or investment, you could look towards that as a way to reduce your AGI.

#6 Ask For An Extension – Not sure how this is a tax break but nearly everyone can get an extension these days. If you owe, you still have to pay by April 17th. If you don’t, you should probably get this done ASAP anyway.

{ 6 comments, please add your thoughts now! }

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6 Responses to “Six Great Tax Breaks”

  1. FMF says:

    I posted on this too and would agree on your thoughts on #6. Why were “6 Tips” so important? Couldn’t they just have left well enough alone at 5?

  2. jim says:

    They kind of got confusing mixing in text they intended for #5 into #4. They start talking about home office deductions in a tip about taking losses in stocks… I didn’t mention it in my thoughts but it seemed like an editorial error.

    They also didn’t expand on the “Above The Line” deduction either and I would’ve had I had a little more time.

  3. Matt says:

    Tax time is great for turning bad outcomes in one’s business into good news. Thanks to the expenses of pursuing a would-be major client (who ended up not signing…oh well, better luck next year) I was able to cut my FY05 AGI by almost $30,000, and will (when the deposits finally clear…which should be sometime next week, if not today or tomorrow) be getting back almost every penny of federal and state income tax I paid last year. (I certainly don’t think of myself as “low-income”, but thanks to the business writeoffs my AGI was low enough to qualify for that extra credit on my retirement savings too. Yay!)

    Of course, I’d rather have _gotten_ the client and been in position to be a millionaire by the end of 2006, but since I didn’t get them, it’s cool that I can make such tasty tax lemonade.

    I concur about extensions…I’ve never understood my friends who took them. If the government owes you a refund, better to get it ASAP. (Which is why I submit my taxes the same day I receive the last of my tax paperwork.) And if you owe them, you still have to pay by the normal deadline, and the extension only gives you extra time to fill out the paperwork.

  4. Avery says:

    If you have a SIMPLE or SEP, your contributions are due when you file your taxes (and not on April 15). This means that if you file an automatic 6-month extension for your taxes, then you also get a 6-month extension for making your contribution. So if you don’t have the cash on hand on April 15 for your SIMPLE or SEP, you take the extension, wait 6 months, make your contributions, then file your taxes with the deduction. I’ve done this for the past two years. This is at least one reason why your #6 is useful.

  5. Colleen says:

    Does anyone know if #3 applies to people who contribute to a state retirement system? Ex. Penn. State Retirement System for PA state employees? The form looks like it’s just for those contributing to Roth IRAs and 401Ks. Thanks.

  6. jim says:

    If you mean like a 403b, I believe they are included.

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