Tips To Save Your Tax Bill – Part II

Increase Tax Deductions

Another way to reduce your tax bill is by playing around with deductions. Income on which tax is calculated is called the taxable income. It is calculated by reducing deductions and exemptions from AGI. Standard deduction can be taken by almost everyone. However you can play around with your expenses and itemize deductions.

Deductions can be of various kinds. The most common deductions are for health care expenses, state and local taxes, personal property taxes, mortgage interest, charity, job-related expenses, tax preparation fees, and investment-related expenses. We suggest that one should keep track of these itemized expenses either using a spreadsheet or personal finance program to enable quick comparison of your itemized expenses with your standard deduction. Also always take the higher of your standard deduction or your itemized deduction. Mortgage interest, state taxes, and gifts to charity are currently the three biggest deductions.

Standard deduction and personal exemptions also depends on your filing status and the number of dependents you have. Hence if you are married and have children who are dependent on you don’t forget to mention that in your tax filing and get an increased standard deduction and personal exemptions.

Timing your expenses

Like tax credits one can lower their tax bill by proper timing of expenses. We are not suggesting to with hold expenses to save taxes. But if the expense is not a necessity then we suggest to time it rightly to get the maximum tax benefit. Take for instance those expensive dental implants which are not covered by insurance that you always wanted to do. Should you get it done now or wait until January. Unreimbursed medical expenses that are more than 7.5% of adjustable gross income are deductible for tax purposes. So if you are past that limit in 2009 then go ahead and get those implants or a full-body scan done which your insurance doesn’t cover.

Timing of expenses can go a long way in saving on your tax bill. Like for instance the American Opportunity Credit which is $2,500 per undergraduate student in 2009 and $2,500 in 2010 given that the student has qualified undergraduate education expenses of $4,000 for each year. So if your child has taken the fall semester off, or went to a cheap college in the fall that didn’t cost you a full $4,000 in bills then we suggest that you prepay spring 2010 tuition fees before Dec. 31 so as to be eligible for the full 2009 break.

Read more at: Tips To Save Your Tax Bill – Part I