Young families should make these moves throughout the year to
keep their tax bills low at tax time. Here are the areas where you
should look for savings:
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. 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.
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. The maximum you can
contribute to a health care flex plan is $2,500.
Change in family = change in flex plan.
If you get married or divorced, or have or adopt a child during
the year, you can change the amount you're setting aside in a
medical reimbursement plan. If you anticipate more medical bills,
steer more pretax money into the account; if you anticipate fewer,
you can pull back on your contributions so you don't have to worry
about the use-it-or-lose-it rule.
Pay child-care bills with pre-tax dollars.
After taxes, it can easily take $7,500 or more of salary to pay
$5,000 worth of child care expenses. But, if you use a child-care
reimbursement account at work to pay those bills, you get to use
pre-tax dollars. That can save you one-third or more of the cost,
since you avoid both income and Social Security taxes. If your boss
offers such a plan, take advantage of it.
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.
Stash cash in a self-employed retirement account.
If you have your own business, you have several choices of
tax-favored retirement accounts, including Keogh plans, Simplified
Employee Pensions (SEPs) and individual 401(k)s. Contributions cut
your tax bill now while earnings grow tax-deferred for your
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 your 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 your 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.
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 23.5 cents
per mile for a 2014 move, plus parking and tolls.
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.
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.
Let Uncle Sam help pay for your home.
A new home, whether it's your first or a trade-up, usually means
a bigger mortgage. And that means a bigger mortgage interest
deduction and maybe higher property taxes, too. You can adjust tax
withholding from your salary to account for the new tax breaks, and
beef up your take-home pay to help pay the bills.
Save for college the tax-smart way.
Stashing money in a custodial account can save on taxes. But it
can also get you tied up with the expensive "kiddie tax" rules and
gives full control of the cash to your child when he or she turns
18 or 21. Using a state-sponsored 529 college savings plan can make
earnings completely tax free and lets you keep control over the
money. If one child decides not to go to college, you can switch
the account to another child or take it back.
Deductions for Non-Itemizers
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
, including student loan interest, job-related moving expenses,
costs incurred by reservists and performing artists and
contributions to health savings accounts and IRAs. Casualty losses
-- which used to be deductible only by those who itemize -- can
also be added to the standard deduction. Keeping good records will
save you money.
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.
Investment 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.
Beware of Uncle Sam's interest in your divorce.
Watch the tax basis -- that is, the value from which gains or
losses will be determined when property is sold -- when working
toward an equitable property settlement. One $100,000 asset might
be worth a lot more -- or a lot less -- than another, after the IRS
gets its share. Remember: Alimony is deductible by the payer and
taxable income to the recipient; a property settlement is neither
deductible nor taxable.
Make your IRA contributions sooner rather than later.
The earlier in the year 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
The stork brings tax savings, too.
A child born, or adopted, during the year is a blessed event for
your tax return. An added dependency exemption will knock $3,900
off your taxable income, and you'll probably qualify for the $1,000
child credit, too. You don't have to wait until you file your
return to reap the benefit. Add at least one extra withholding
allowance to the W-4 form filed with your employer to cut tax
withholding from your paycheck. That will immediately increase your
Tally adoption expenses.
Thousands of dollars of expenses incurred in connection with
adopting a child can be recouped via a tax credit, so it pays to
keep careful records. The credit can be as high as $13,190. If you
adopt a special needs child, you get the maximum credit even if you