Young taxpayers should plan these moves throughout the year to
reduce their taxable income and earn more tax deductions. Here are
the areas where you should look for tax 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. 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.
Switch to a Roth 401(K).
If your employer offers the new breed of 401(k), seriously consider
opting for it. Unlike the regular 401(k), you don't get a tax break
when your money goes into a Roth, but younger workers are often in
lower tax brackets ... so the break isn't so impressive anyway.
Also unlike a regular 401(k), money coming out of a Roth 401(k) in
retirement will be tax-free ... at a time you may well be in a
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.
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.
Use a Roth IRA to save for your first home.
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. Say $5,000 goes
into a Roth each year for five years for a total contribution of
$25,000. Assuming 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
Deduct interest paid by Mom and Dad.
Until recently, parents had a good reason not to help their
children pay off student loans. If the parents were not liable for
the debt, then no one got to deduct the interest. Now, however,
when parents pay, it's treated as if they gave the money to the
real debtor, who then paid off the loan. The child gets the tax
deduction, 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. And, whether you have one job between
you or two or more, revise withholding at work to reflect the tax
bill you'll owe as a couple.
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.
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.
Grab a 50% credit for saving.
One of the most generous tax credits available effectively rebates
up to 50% of what low-income workers sock away for retirement. If
your income is below $25,000 on a single return or $50,000 on a
joint return, you can get a credit of between 10% and 50% of up to
$2,000 you stash in an IRA or company retirement plan.
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 claim the no-questions-asked standard deduction is if it's
bigger than the total of all the costs you could deduct if you
itemized. And, you can deduct a lot of things even if you don't
itemize, including student loan interest, certain expenses for
reservists and performing artists, contributions to health savings
accounts and contributions to IRAs.
See All Tax Savings Strategies