Ways to reduce taxable income


R

rvsw

Apart from investing in 401(K) / IRAs - are their any other
ways to reduce taxable income? I have to take standard
deduction(can't do itemized deduction since expenses are
less than standard deduction).

Thanks
 
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G

Gene E. Utterback, EA

rvsw said:
Apart from investing in 401(K) / IRAs - are their any other
ways to reduce taxable income? I have to take standard
deduction(can't do itemized deduction since expenses are
less than standard deduction).
You should be focusing NOT on reducing your taxable income,
but rather on maximizing your after tax cash position. For
example, let's say you are in a combined 30% (Federal and
State) tax bracket. For every $1,000 you spend you save
$300 in taxes. This means you are out $700. Wouldn't it
make more sense to pay the $300 in tax and put the $700 in
your pocket?

The trick is to convert a nondeductible expense, one that
you are going to incur anyway, into a deductible, or at
least partially deductible, expense. For example, if you are
renting a house for $1,000 per month you get no deduction.
However, if you bought a house with a $1,000 per month
payment you get to deduct the interest portion of the
payment and the government rebates you based on your tax
bracket.

Gene E. Utterback, EA
 
J

John H. Fisher

Apart from investing in 401(K) / IRAs - are their any other
ways to reduce taxable income? I have to take standard
deduction(can't do itemized deduction since expenses are
less than standard deduction).
Perhaps purchasing a rental property could produce
additional income, while building equity, and serve as a tax
shelter. Of course, if you were to purchase a personal
residence, your mortgage interest and taxes would be
deductible.

"Jack" - John H. Fisher - (e-mail address removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=:)
 
D

Dick Weaver

rvsw said:
Apart from investing in 401(K) / IRAs - are their any other
ways to reduce taxable income? I have to take standard
deduction(can't do itemized deduction since expenses are
less than standard deduction).
Your assertion that you "can't do itemized deduction"
remains to be proved. Suppose all deductable expenses for
2004 and 5 were combined into 2005, or 2004, 5, and 6
combined into 5. "All" is, of course, not possible. But a
lot of expense can be moved between years. Take advantage of
the IRS rule that check payments are deductable in the year
the check is written, not the year received/cashed. Below is
related text from another posting.

dick w

------------------------------------

To increase your Schedule A deductions, you may group as
many deductions as possible into alternate years, or every
third year, and take the standard deduction in the
intervening years (this strategy is not universally
rewarding, but you should be aware of the possibility). You
group deductions by paying them in the same year. For
example, instead of donating $1000 to your church every
year, you donate $2000 every other year - you have grouped
two years deductions.

Assume that you itemize $8000 in deductions each year and
that the standard deduction is $7000. So every two years
your total deductions are 2 x 8000 = 16000. Now move $2000
of deductions from one year to the other: one year's
deduction changes 8000+2000 = 10000, the other year's
deduction changes 8000-2000 = 7000. Shouldn't that be 6000?
No, for that year you now take the standard deduction! Your
two years deduction total is 10000+7000 = 17000; you have
gained $1000 in deductions. Move enough from one year to
the other to reduce the 1st year to the standard deduction -
then every additional dollar moved is an additional
deductable dollar.

Similar logic applies if your itemized deductions are less
than the standard deduction and you are able to group enough
deductions into one year to exceed the standard deduction
for that year.

Deductions that might be easily grouped include charitable,
some state income taxes (estimated tax payments, for
example), some medical expense (it's the year paid, not the
service year, that determines tax year - so in December of
the itemizing years make copayments, even if estimated,
before leaving the doctor's office) and property taxes (if a
fee is charged for a late payment and you save more than
that fee on taxes - its still a good deal). If you receive
your January auto registration bill in December, then you
can pay two years in the same year (in January and in
December for next year) thus grouping the deductable parts
for 2 years. If you receive your auto registration bill in
May, due in July, well - you have another reason for buying
the next car in January! If you have annual medical exams
(and have deductable medical expense), schedule them early
Jan and late Dec of the year you itemize, none next year -
that IS an annual schedule.

What the IRS calls "Recoveries", reimbursements for expense
claimed as an itemized deduction in a prior
year, are a problem. Typical examples are state taxes -
with a refund received next year - and medical payments -
with an insurance payment received next year. When you
itemize deductions, recoveries of those expenses in later
years go onto the line 10 worksheet (page 24 of the 2003
1040 instructions) and often end up on line 10 of your tax
return, increasing your AGI. For many people, trading a
deduction in one year for an AGI increase in the next year
is bad news. There are common cases where for every $1
deduction that is recovered, you will pay taxes on about $2
in the recovery year.

What to do about recoveries? The best answer - avoid them.
Never claim a deductable that you will recover unless you
are convinced the tax code requires you to do so.
Never overpay state taxes, always adjust witholding or
estimated payments so that you owe a little when filing (but
not so much as to be penalized). Only claim copayments
as medical deductables, never claim amounts that you
expect your insurance company to reimburse - thus insurance
reimbursements will not be recoveries. If, in fact,
your insurance company does not reimburse, then file an
amended return for the increased expense (amended returns
are you friend, use them to your advantage).

-----
 
A

Arthur Kamlet

rvsw said:
Apart from investing in 401(K) / IRAs - are their any other
ways to reduce taxable income? I have to take standard
deduction(can't do itemized deduction since expenses are
less than standard deduction).
If you contributed to a 401k/IRA check out form 8880 to see
if you can get a tax credit too.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
H

Herb Smith

Apart from investing in 401(K) / IRAs - are their any other
ways to reduce taxable income? I have to take standard
deduction(can't do itemized deduction since expenses are
less than standard deduction).
Make sure that you max out your 401K for the year, as the
IRA contribution MAY NOT be deductible.

Take advantage of any 125 cafeteria plans or FSAs offered by
your employer, to pay for medical costs, child care, etc
with pre-tax money. Don't forget the "use it, or lose it"
provision.

Get married, buy a house, have a bunch of kids. All
guaranteed to reduce your taxable income (as well as your
disposable income).
 
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M

Mark Rigotti, CPA

rvsw said:
Apart from investing in 401(K) / IRAs - are their any other
ways to reduce taxable income? I have to take standard
deduction(can't do itemized deduction since expenses are
less than standard deduction).
Soapbox mode on:

I am always amazed at people wanting to spend money to
reduce their taxes. There is no 100% tax rate in the US.
Therefore, if you spend $100 in deductible expenses you will
only receive a percentage of that back in reduced taxes.
Therefore, you are spending more than you receive back and
have just thrown away money.

Soapbox mode off:

Thank you to all.
 
L

Lynn Guini

rvsw said:
Apart from investing in 401(K) / IRAs - are their any other
ways to reduce taxable income? I have to take standard
deduction(can't do itemized deduction since expenses are
less than standard deduction).
When Clinton signed the largest tax increase in history, I
started working a lot less.
 
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J

JMc

I am always amazed at people wanting to spend money to
reduce their taxes. There is no 100% tax rate in the US.
Therefore, if you spend $100 in deductible expenses you will
only receive a percentage of that back in reduced taxes.
Therefore, you are spending more than you receive back and
have just thrown away money.
Why not think of it as the government subsidizing your
retirement plan or expense.

Why not let the government kick in $35,000 for that $100,000
Hummer you wanted. (prior to AJCA of 2004, of course).
 

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