Single taxpayers should plan these moves throughout the year to
reduce taxable income and increase tax deductions. Here are the
areas where you should look for tax savings:
College and other expenses
Give yourself a raise. If you got a big tax refund this year, it
meant that you're having too much tax taken out of your paycheck
every payday. So far this year, the average refund is nearly
$2,800. Filing a new W-4 form with your employer (talk to your
payroll office) will insure that you get more of your money when
you earn it. If you're just average, you deserve about $225 a month
extra. Try our
easy withholding calculator
now to see if you deserve more allowances.
Go for a health tax break. Be aggressive if your employer offers
a medical reimbursement account -- sometimes called a flex plan.
These plans let you divert part of your salary to an account which
you can then tap to pay medical bills. The advantage? You avoid
both income and Social Security tax on the money, and that can save
you 20% to 35% or more compared with spending after-tax money.
Starting in 2013, the maximum you can contribute to a health care
flex plan is $2,500. Use our
to figure out how much you can save.
Switch to a Roth 401(k). But if you are concerned about
skyrocketing taxes in the future, or if you just want to diversify
your taxable income in retirement, considering shifting some or all
of your retirement plan contributions to a Roth 401(k) if your
employer offers one. Unlike the regular 401(k), you don't get a tax
break when your money goes into a Roth. On the other hand, money
coming out of a Roth 401(k) in retirement will be tax-free, while
cash coming out of a regular 401(k) will be taxed in your top
bracket. A provision in the fiscal cliff bill enacted Jan. 1 allows
you to convert money in your regular 401(k) to your Roth 401(k).
(Previously, this type of conversion wasn't available unless you
were 59 ½ or older or had left your job) Just remember that you'll
have to pay income taxes on the amount you convert.
Be smart if you're a teacher or aide.
Keep receipts for what you spend out of pocket for books, supplies
and other classroom materials. You can deduct up to $250 of such
out-of-pocket expenses ... even if you don't itemize.
Tally job-hunting expenses. If you count yourself among the
millions of Americans who are unemployed, make sure you keep track
of your job-hunting costs. As long as you're looking for a new
position in the same line of work (your first job doesn't qualify),
you can deduct job-hunting costs including travel expenses such as
the cost of food, lodging and transportation, if your search takes
you away from home overnight. Such costs are miscellaneous
expenses, deductible to the extent all such costs exceed 2% of your
adjusted gross income.
Keep track of the cost of moving to a new job. If the new job is
at least 50 miles farther from your old home than your old job was,
you can deduct the cost of the move . . . even if you don't itemize
expenses. If it's your first job, the mileage test is met if the
new job is at least 50 miles away from your old home. You can
deduct the cost of moving yourself and your belongings. If you
drive your own car, you can deduct 24 cents per mile for a 2013
move, plus parking and tolls.
Pay tax sooner than later on restricted stock.
If you receive restricted stock as a fringe benefit, consider
making what's called an 83(b) election. That lets you pay tax
immediately on the value of the stock rather than waiting until the
restrictions disappear when the stock "vests." Why pay tax sooner
rather than later? Because you pay tax on the value at the time you
get the stock, which could be far less than the value at the time
it vests. Tax on any appreciation that occurs in between then
qualifies for favorable capital gains treatment. Don't dally: You
only have 30 days after receiving the stock to make the
Pay back a 401(k) loan before leaving a job.
Failing to do so means the loan amount will be considered a
distribution that will be taxed in your top bracket and, if you're
younger than 55 in the year you leave the job, hit with a 10%
Ask your boss to pay for you to improve yourself.
Companies can offer employees up to $5,250 of an educational
assistance tax free each year. That means the boss pays the bills
but the amount doesn't show up as part of your salary on your W-2.
The courses don't even have to be job related and even
graduate-level courses qualify.
Use a Roth to save for your first home.
Sure, the "R" in IRA stands for retirement, but a Roth IRA can be a
powerful tool when you're saving for your first home. All
contributions can come out of a Roth at any time, tax- and
penalty-free. And, after the account has been opened for five
years, up to $10,000 of earnings can be withdrawn tax- and
penalty-free for the purchase of your first home. Assume $5,000
goes into a Roth each year for five years, and the account earns an
average of 8% a year. At the end of five years, the Roth would hold
about $31,680 -- all of which could be withdrawn tax- and
penalty-free for a down payment.
College and Other Expenses
Let Uncle Sam pay part of your education expenses.
If you're paying your own tuition for a graduate course or other
training, you may qualify for a Lifetime Learning Credit that's
worth 20% of up to $10,000 of qualifying expenses. That could knock
as much as $2,000 of your tax bill. The right to claim this tax
saver phases out if your income exceeds $50,000 on a single return
or $100,000 on a joint return.
Deduct expenses even if you don't itemize.
Taxpayers who claim the standard deduction often complain that
itemizers get the better deal. But that's not true. The only reason
to use the no-questions-asked standard deduction is if it's bigger
than the total you could deduct if you itemized. And, you can
deduct a lot of things even if you don't itemize, including student
loan interest, job-related moving expenses, costs incurred by
reservists and performing artists and contributions to health
savings accounts and IRAs.
Deduct interest paid by mom and dad. When parents make payments
on a child's student loan, the child can claim a tax deduction for
the interest, as long as the parents can't claim him or her as a
dependent, even if he or she doesn't itemize.
Time your wedding.
If you're planning a wedding near year-end, put the romance aside
for a moment to consider the tax consequences. The tax law still
includes a "marriage penalty" that forces some pairs to pay more
combined tax as a married couple than as singles. For others, tying
the knot saves on taxes. Consider whether Uncle Sam would prefer a
December or January ceremony.
Marry your withholding, too.
Tying the knot means a lot to your Uncle Sam, too. Before the
wedding, soon-to-be husband and soon-to-be wife should get a W-4
form and figure how to arrange withholding from your paychecks to
match your new tax status.
Roll over an inherited 401(k).
A recent change in the rules allows a beneficiary of a 401(k) plan
to roll over the account into an IRA and stretch payouts (and the
tax bill on them) over his or her lifetime. This can be a
tremendous advantage over the old rules that generally required
such accounts be cashed out, and all taxes paid, within five years.
To qualify for this break, you must name a person or persons (not
your estate) as your beneficiary. If your 401(k) goes through your
estate, the old five-year rule applies.
Investments and Retirement Savings
Check the calendar before you sell.
You must own an investment for more than one year for profit to
qualify as a long-term gain and enjoy preferential tax rates. The
"holding period" starts on the day after you buy a stock, mutual
fund or other asset and ends on the day you sell it.
Don't buy a tax bill.
Before you invest in a mutual fund near the end of the year, check
to see when the fund will distribute dividends. On that day, the
value of shares will fall by the amount paid. Buy just before the
payout and the dividend will effectively rebate part of your
purchase price, but you'll owe tax on the amount. Buy after the
payout, and you'll get a lower price, and no tax bill.
Make your IRA contributions sooner rather than
The sooner your money is in the account, the sooner it begins to
earn tax-deferred or, if you use a Roth IRA, tax-free returns. Over
a long career, this can make an enormous difference.
See All Tax Savings Strategies