This article was originally published on this site
Every year, I help my friends and family go over their taxes and try to get them as much back as possible. And every year, without fail, they’re excited by the amount they get as a refund.
I’m happy to help. I mean, this country was founded by a bunch of guys who didn’t want to pay taxes to a government that didn’t really represent their interests. So, I figure it’s my patriotic duty to carry on that tradition.
Thanks for Not Stealing ALL of My Money
But I can’t help but be a little amused by the ecstasy some of my friends go through when they see how much they’ll get back. Just think: If I was your landlord and I overcharged you a few hundred dollars a month all year and at the end of the year gave that money back, would you thank me? Or would you be a little ticked off that I was holding onto that much of your cash all year?
That’s basically what happens when you get money back as a tax refund from the government. And no matter your political leanings, I’m sure we can agree that we can put that money to work far better than the government.
And it’s not like they’re paying you back with interest or giving you a late fee for holding your money all year.
Last year, the S&P 500’s total return was about 16%. Think Uncle Sam is going to pay you that kind of interest on your refund? Yeah. Me neither.
That money could’ve been a lot more useful in your investing account all year and not in the government’s pocketbook.
So, if you’re getting a big refund (or any refund) every year, you might want to think about claiming more exemptions to reduce the amount you’re paying the government and increase the amount you’ve got to invest.
Making Sure You Don’t Owe Too Much
There’s a ton you can do to reduce your tax burden in the future, starting this year. But as far as reducing the amount you have to pay for last year’s earnings, you’re pretty limited.
If you haven’t filed yet, there are a handful of ways you can make sure to owe as little as possible or get back everything you’re due. I’ll go over the most common and then get into some of the ways you can cut that tax bill going forward.
- Claim every single donation: Give some stuff to Goodwill or your local church? Make a list of all the items you donated, what they were worth new, and what they’d sell for in a thrift shop. Add that to your deductions. Did you drive anywhere to volunteer at a non-profit last year? Maybe headed over to a Habitat for Humanity site to pound some nails? Those miles are deductible. Did you make sandwiches for a homeless shelter? Then you can deduct the cost of the ingredients. If you give money to your church, synagogue, or mosque, you can claim that, too. When you start to deduct everything you do for a good cause, it can really add up.
- Deduct those business expenses: Do you have a business? Make bracelets and sell them on Etsy? Maybe you plow snow in the winter or mow lawns in the summer. Have a pressure washer and get paid once in a while to clean someone’s deck? Those are businesses, and they have expenses. Mileage on your “business vehicle” can be deducted from your taxes. So can the gas for your snow blower, the money you spend on fancy beads and clasps for those bracelets, and the hoses you need for your pressure washer. Think hard about it, and you can come up with a ton of business expenses that will reduce your tax burden. Heck, even if you don’t have your own business, you can deduct anything you spend for work (outside of commuting to and from the office) that’s not reimbursed by the company. You need a new tool to do your job? That’s deductible. Uniforms you have to supply? Deductible. Tolls and mileage to other offices outside your normal one? That’s deductible, too! Practically everything you pay for to do your job that your company doesn’t reimburse is a potential deduction on your taxes.
- Don’t forget your medical expenses: Let’s face it, even with insurance, health care can be expensive. But it’s tax-deductible. If you pay for anything out of pocket, you can claim it on your tax return. Needed crutches, a wheelchair, or a sling last year? Deduct it! Pay a copay at the doctor, dentist, or pharmacy? Deduct that, too. Miles driven to medical and dental appointments can reduce your tax burden as well. Literally anything you have to pay for yourself when it comes to getting and staying healthy is a potential tax deduction. Don’t let those slip through the cracks.
- Claim job-hunting expenses: Were you out of work last year and looking for a new career? It’s not a great feeling — trust me, I’ve been there. We all have. But you can claim any expenses related to finding a new job on your taxes. That’s everything from miles driven for interviews to resume-writing services. Shoot, if you had to move to a new area to get that job (or have a better chance of finding one), you can claim those expenses, too. Even if you weren’t successful, they’re all still deductible.
- Cushion your investment losses: I wish every investment could work out the way we want it to. But that’s just not the case. Even the best stock pickers get it wrong sometimes. But you don’t have to eat that loss all by yourself. If you sold stocks at a loss last year, you can claim the capital loss as a tax deduction. You can claim the fees you paid your broker to dump those losing investments, too. There’s even a strategy called “tax loss harvesting” where you sell losing investments at the end of the year just to reduce your tax burden.
Action in the Present Changes the Future
So, those are some ways to reduce what you owe from last year. There are a few more, but there’s not much you can do today to change what happened yesterday.
What you can do, though, is make changes today and keep from paying too much in the future. There are a ton of things you can do, and I’m going to help you get started with a list of some of the simplest ways to reduce your tax burden all year long.
Don’t worry, none of them involve moving to one of the nine states with no income tax. But you could always do that, too.
- Buy a house: Renting an apartment? Stop. Get a loan and buy that house. As you already know, your interest is tax-deductible. And some states still have some pretty sweet deals for first-time homeowners. Already have a house? Go ahead and buy a vacation property. You’ll be able to claim the interest from your loan. And if you’re not using it all the time, there’s another way that extra property can help reduce the taxes you owe.
- Start a business: Remember that vacation property? Rent that sucker out. You can claim repairs to the house and maintenance on the property as a business expense. You can even claim miles you drive or flights you take to check on the place. Don’t have a vacation property? That’s cool. You can start a different business. Maybe you’ve got that snow blower or lawnmower, but never used it on anything but your own property. Advertise your services, whatever they are. Even if it’s photography or arts and crafts. If you can sell it, you’ve got yourself a business, and you can claim all the expenses it involves — even a part of your house as an office to run it from, or whatever you pay your kids to help. Best part? Uncle Sam knows it takes time to get a business running. And he’s patient. You’ve got a few years until your business even has to make any revenue. And if you don’t have any customers by that time, well, your business failed and it’s time to try something different.
- Keep learning: Anything you spend on job-related continuing education is tax-deductible. Have to go back to school for another degree? Or did you finally decide to finish the one you never got? Those expenses are a deduction. Even if it’s just a course or a certification. As long as it’s to make you better at your job, you can deduct it. Remember that photography business? Well, you can’t be a good photographer without a class or two at your local community college, can you? Take it. And deduct it from your taxes.
- Boost your contributions: Remember when I said to increase your exemptions? Well, put that extra money to work in your 401(k). It’ll pay off in both the long run and the short term. First, you’ll have more money to retire with. That’s great. But it also reduces your taxable income. Less income means less in taxes. Plus, those funds grow tax-free until your retirement. It’s a win-win!
- Make use of your HSA: If you’ve got access to a health savings account with your insurance, use it. The money you put in there reduces your taxable income, too. And if you don’t spend it this year, it rolls over to the next. Forever. So, step up that HSA contribution, and step down your tax burden.
- Harvest your losses: Sell those losing investments. First, they offset any gains you made in the market. Then you can claim up to $3,000 in losses this year and roll any extra forward to future years. You can even buy those stocks back after a month if you think they’re going to finally head back up. And make sure to count any reinvested dividends. This increases the cost basis and reduces your capital gain (or increases your capital loss) when you sell.
- Start a Roth IRA: My colleague Briton Ryle and I are adamant that our subscribers to The Wealth Advisory have one. And for very good reason. While you don’t get a tax break right now on contributions, you don’t pay taxes on the money when you take it out later on down the road. With a 401(k), you pay taxes when you take it out. And you pay them at your highest tax bracket.
- Upgrade your home: You can get a tax break if you’re a homeowner who upgrades to newer, energy-efficient equipment, from Energy Star appliances to solar panels and geothermal pumps. Not only will you save money on your utilities bill, but you’ll also owe less in taxes thanks to your green investments.
- Donate stocks: If you’re thinking about giving to charity, give stocks or mutual funds, as long as you’ve owned them for a year or more. You get to claim the fair market value of those assets when you donate them, not just what you paid for them. So, if you’ve got some stocks that are worth $150 more now than when you bought them, you might want to think about making them your annual tithe. You get to feel good. The charity gets much-needed resources. And you can claim the full value and not just what you paid for them before they increased in price.
- Save tax-free for private school: If you’re sending your kid to a private school, those costs can add up. But there’s a type of savings account called a Coverdell that can save you some cash. Even if your kids aren’t in school yet and you’re just planning on sending them to private school, you can contribute to these. You don’t get a deduction, but the funds grow tax-deferred and can be taken out tax-free to pay for tuition and fees. You can even use the money for books, computers, tutoring, school supplies, and uniforms. Heck, if you’ve got to pay for a bus to get your kid there, you can use the cash for that, too. And you’ll pay no taxes on any gains it makes while in the account. Not while it’s in there, and not when you take it out.
Those are just a few of the ways you can reduce your tax burden. There are lots more, but that’ll give you a good start to keeping what’s yours and making Uncle Sam work a little harder for his share of your income. Just make sure you keep your receipts so you can back up your claims if you run into an audit.
Also, it’s always a good idea to seek professional help when you’re filing your taxes. And I’m not talking about the H&R Block cubicle at Wal-Mart. Those people get taught how to enter stuff into a program not that different from TurboTax. They’re not accountants. And you can’t count on them to know all of the ways you can reduce your tax burden. Trust me, you’ll be happy to pay the relatively small fee an accountant charges when you see how much you can legally save in the long run.
And if you’re interested in learning more about the other ways you can reduce your tax burden, comment in the section below this article on our website and let me know. If there’s enough interest, I’ll put together a report with as many legal ways to save on taxes as I can come up with and post it for everyone to see.
So, make sure you take advantage of all your deductions and all available tax credits. And don’t forget to get your taxes filed by April 15th. You don’t want to pay a late fee on top of the taxes you can’t get out of paying with these tips.
To investing with integrity (and keeping what’s yours),