You enter complicated territory when you deal with state and federal income taxes. Although SLN! doesn’t cover tax planning in any great detail, you can save thousands if you take advantage of basic opportunities. Important: consult your tax advisor before you pursue any of these tactics.
□ 20.2.1 Fund Tax Advantaged Retirement Accounts
The federal government rewards you for payments into traditional IRAs, Roth IRAs, and 401k’s, to name a few. Fund these accounts to slash your tax burden and boost your net worth.
□ 20.2.2 Fund Other Tax Advantaged Accounts
The feds also recognize other specialized accounts—including 529 College Savings Plans, Health Savings Accounts, and Flexible Spending Accounts (for healthcare and dependent care expenses).
□ 20.2.3 Act on Governmental Incentives
Governments often offer tax breaks for socially desirable spending. In 2009, for instance, I learned: (1) that the IRS would let me deduct the sales tax on any new vehicles I bought that year; (2) that my home state would issue a $2,880 tax credit for buying a new hybrid; and (3) that the “Cash for Clunkers” program would pay $4,500 for my 1998 Ford Explorer (170,000 miles with a bad transmission). Faced with these programs, which overlapped more than a little, I surrendered my Explorer (19 MPG rating) and replaced it with a new Prius (50 MPG rating). I saved $7,500 upfront, and since then I’ve saved thousands more on gas. Governments dream up new programs like this all the time, so keep your eyes peeled.
□ 20.2.4 Convert Consumer Debt into Deductible Debt
If you refinance your home mortgage, use some of the proceeds to pay off car loans and credit card accounts. This saves money. Not only are mortgage interest rates lower than those for consumer loans, mortgage interest is deductible. The downside: refinancings are incredibly complex. For a FREE guide, visit HSH.com and use the “Mortgage Refinancing Starter Kit.”
□ 20.2.5 Combine Business With Deductible Pleasure
The tax code allows deductions for many business expenses, including meals, sports tickets, and hotels.
□ 20.2.6 Deduct Mileage
Travel for business, charity, and medical care may be deductible.
□ 20.2.7 Time Your Deductible Spending
If you itemize, many expenses are deductible, including property taxes, mortgage interest, and charities. If you’re near the threshold for itemizing, accelerate any future years’ deductible expenses into the current year. If you’re not close to itemizing, postpone any deductible expenses until after January 1 of the next year.
□ 20.2.8 Pay With Pre-Tax Dollars
The IRS allows this for a few expenses only and, once again, the rules are complex. For example, employers can deduct pre-tax dollars from your paycheck and use them to cover your public transportation or parking costs. I had personal experience with this when I last changed jobs. Although my old employer had funded my parking on a pre-tax basis, my new employer didn’t, so each month I coughed up $150 to a nearby garage—all paid for with after-tax dollars. Ouch. After several months of this, I found out that my wife’s employer let its employees use pre-tax dollars to pay for onsite parking, so I began leaving the car at her building. How much can you save when you use this tactic? The answer depends upon your own top marginal tax rate. At a combined state and federal marginal rate of 40 percent, for example, parking with pre-tax dollars as described above saves $720 per year ($150 x 12 = $1800 x 40% = $720).