Paying the lowest taxes possible should be a national pastime. It’s all about working the tax code in our favor. Everyone has the opportunity to do it. You just need to know where your income falls in the tax brackets.
You can open an IRA and deduct the contributions. Or take advantage of complex tax shelters. It’s called tax avoidance and it’s entirely legal. What holds most of us back is the complexity of the code itself. It’s always a good idea to have a few tax tips handy.
Plan To Itemize Deductions
If you usually fall short of taking the itemized deduction, plan on it this tax season. Generally, the larger your deduction the less federal taxes you pay. I have yet to hear anyone complain about paying less taxes.
Check the Schedule A instructions for any potential deductible expenses and plan early. One example is to squeeze an extra mortgage payment in before year-end. The same can be done with a few bills or donations including property tax payments and medical or dental expenses.
American Opportunity Tax Credit
The American Opportunity Tax Credit will expire at the end of this year. If you haven’t already maxed out this opportunity, now is a good time to start. It offsets higher education expenses to the tune of $2,500.
Just apply any tuition expenses for this year towards the credit. If you don’t have any 2012 college costs, pay those 2013 costs early. Or just enough to maximize the credit. This also includes course materials, like books, as well. So before the kids come home from winter break, have them buy their second semester books early. And keep those bookstore receipts!
Cost Basis Changes
If you sold any securities through a taxable brokerage account, do you know where you stand? Do you have a profit or a loss on the year so far? It’s a good idea to keep track, just for tax reasons.
The last two years, the IRS changed how to calculate cost basis for stocks, mutual funds, ETFs and automatic dividend reinvestment. The cost basis method you use must be decided at the time of the sale. And your broker’s default method may not always be the best choice.
Organize Those Records
Lastly, all you procrastinators can get a head start by keeping everything organized throughout the year. Just knowing which tax records to keep will go a long way in making tax season as painless as possible. And the last thing you want is a surprise next April.