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Financial expert Michelle Singletary answers questions about personal finance and the economy.
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Reducing Taxes
Q: What are some effective ways to reduce tax consequences?
Brian Humphrey, Jersey City, NJ
A: I imagine, for most people, the ideal is to never owe taxes. So, people spend time figuring out how to reduce their tax obligation. And some people go to jail because they figured wrong! Remember the first season winner of Survivor? Richard Hatch went to jail for trying to avoid paying his taxes.
As you look for ways to reduce your tax burden, keep in mind the following quote from Oliver Wendell Holmes, Jr.: "Taxes are the price we pay for civilization."
But, I think more people side with Arthur Godfrey, who said, "I'm proud to be paying taxes in the United States. The only thing is--I could be just as proud for half the money."
Or, maybe you fall into the Leona Helmsley crowd. Helmsley infamously said (and I suspect regretted), "Only the little people pay taxes."
What you can deduct depends on your individual situation. Do you work from home? If so, you may be able to take a home office deduction. Do you have unreimbursed medical expenses? Were you spending money to look for a job this past year? Did you put in some energy efficient appliances? If so, you may be entitled to a tax break. Do you have a student loan? If so, you may be eligible for a deduction on some of the interest, depending on your income.
First-time homebuyer? This year, you may qualify for an $8,000 tax credit. Oh, and a credit is way better than a deduction. A tax credit reduces the taxes you owe, dollar-for-dollar. A deduction only eliminates a percentage of the tax that is owed.
So you see, I can't possibly list what deductions work for you specifically.
How do you find legit, legal, "they won't-send-you-to-jail" tax breaks? I would recommend hiring a tax professional or buying tax software. It's nearly impossible for the average person to keep up with the myriad tax breaks and credits available to taxpayers.
Next, I would search the Internal Revenue Service Web site. It is actually very user friendly, and you'll find a lot of good tax tips. For example, the "Tax Topics - Itemized Deductions" page explains a lot of common deductions.
One thing you are definitely doing right is asking this question now, before the end of the year, so that you can position yourself to take advantage of all the deductions and credits you are entitled to have.