There may be a time in your life when you are required to search for ways to save on taxes during a life transition. With taxes being an intrinsic part of your financial decisions, it is important that you educate yourself on how you can save on taxes during major life events such as starting a new job, attaining tertiary education, starting a family, divorce and owning a home.
Acquire information on your company’s fringe benefits. When working for a large employer, you may be entitled to tuition assistance, counseling, (mass transit) commuting assistance and other tax-free benefits.
Invest in 401(k)s, employee stock options, stock purchase plans and other tax-advantaged accounts. Making small investments early will prove more valuable than large ones made over a shorter time span.
You should borrow from your 401(k) only in cases of emergency. If you are in dire straits and you have no other alternative, you can borrow money from your 401(k) without taxes or penalties. When embarking on this process, you should bear in mind that the interest you pay on the loan is not tax deductible. Furthermore, you will lose the opportunity to have your money appreciate had you not broken your plan.
Take charge of paying your own disability premiums. You do not have to pay taxes on your disability benefits when you become disabled. On the other hand, you will be required to pay taxes on disability benefits received if your employer is responsible for such payments.
Take note of your book and equipment expenses. Such costs may be depreciated when you begin working.
Make sure to file a tax return annually.
If you have a traditional IRA, you can withdraw funds penalty-free to pay your tertiary education expenses or those of your children or grandchildren. When withdrawing from such accounts you will be required to pay tax at your regular income tax rate on the funds you withdraw.
For those earning an income under $75,000 (or $110,000 for joint filers) you can receive up to $500 for any child, stepchild, grandchild, adopted child or foster child who is in your care.
If you have adopted a child, you can claim an adoption tax credit if you earn under $115,000. You can receive a tax credit of up to $5,000 or $6,000 for a special-needs child. This tax credit applies to legal fees, adoption fees, court expenses and other costs associated with the year that the adoption is finalized.
Place money into your employer’s dependent care plan. This may decrease the child and dependent care credit you can receive, but is an ideal alternative if you are a taxpayer in the 20-percent tax bracket and above.
If you have medical emergencies, education expenses or you are buying a home, you may withdraw funds from your traditional IRA before the age of 59-1/2. Such withdrawals are penalty-free, but not tax-free.
Make a copy of all your spouse’s business tax returns before filing your divorce. If you did not sign these returns, the IRS will not provide you with copies.
File a separate return if you are unsure of how to file. This will prevent you from being held responsible for your spouse’s misdeeds such as omitting income or overstating expenses. In cases where you file a joint tax return, you will be protected by the innocent spouse provisions of the tax law only if you were unaware of your spouse’s misdeeds.
Educate yourself about the tax implications of support. Alimony is deductible, though child support isn’t. When you describe child support as family support, it is fully taxable to the person receiving such support and deductible to the person paying that support.
You can save taxes on your mortgage interest and property tax deductions.
When you pay your mortgage, you can deduct points paid during that tax year. If you refinanced a loan such points must be written off for the duration of the loan. For example, 1/30 must be taken off every year on a 30-year mortgage.