Looking to cut expenses? Many a household's budgeter looks to the restaurant bill, insurance expenses, or lavish entertainment habits when trying to shape up the family budget.
It's around this time of year, though, that you might start realizing just how much money you pay in taxes. In fact, federal, state, and local taxes amount to a major expense for most households. Just take a look at your paycheck if you want to get a better idea of Uncle Sam's bite.
It's tempting to make taxes a chore that you ignore all year, except for a few frustration-filled weekends in March and April. If you can keep taxes in mind all year long, though, you might be able to take a bite out of this pretty significant expense.
Stay on the lookout for deductions
Nobody wants to spend a couple days sitting around reading IRS publications, but it's worth your while to become familiar with the vast swath of tax deductions that might be available to you. You're probably familiar with the major ones, like the mortgage interest deduction, but you might not have heard about some other expenses that might be tax-deductible -- vehicle taxes, career counseling, and work uniforms, for instance. You can even deduct the cost of tax preparation!
Since you have to do your taxes anyway, you might as well turn the chore into an educational experience. You can get some idea of the deductions you might not be using by skimming the instructions on your IRS forms or paying a little more attention to the myriad questions asked by your tax preparation software. Then, go hunt down some details about the deductions you might be able to use. The deduction information in IRS Publication 17 can give you a good start.
Keep good records
If you've ever spent a lovely Saturday afternoon in April digging through piles of paper trying to find that receipt you got for donating your old dining room set to charity, you'll know that records can make or break your tax return. In many cases, the IRS requires that you have written proof of your expenses to qualify for a break. Sometimes, you'll need good records just to calculate your deductible expenses. You're not going to be able to reconstruct a year's worth of mileage from trips delivering meals to senior citizens in one day.
Once you have a good idea about which deductions might benefit you, make sure to create and save those records. Keep a mileage log in your car if you're traveling for work or charity. Make a file right now for tax records that you can fill all year long. Ask for receipts for anything you feel might generate a tax break. Few people have regretted having too much documentation to show the IRS.
Use tax-advantaged accounts
Uncle Sam may insist on getting his slice of your income, but he also gives you some opportunities to legally protect a lot of your money from his probing hands. If you're not using tax-advantaged retirement, health, and college savings accounts to help lower your tax bill, you're voluntarily paying more than necessary. You can get lots of information about how to make the tax benefits for saving work in your favor from the IRA and College centers.
Don't lend your money to Uncle Sam
It feels really good to get a big check in the mail, but your annual tax refund isn't free money. It's a sizable chunk of your salary that you've lent to the government for months. That means you've lost the time and opportunity to put those dollars to work for yourself. Talk to your human resources department about getting the appropriate forms to adjust your tax withholding.
Consider shifting your consumer debt to home debt
Home debts can generate some pretty big tax deductions, whereas consumer debts only eat a big hole in your pocket. It can be a tax-savvy move to switch some of your consumer debt into home equity debt to get a break on your interest costs. This strategy comes with some dangers. You could be stretching out your debt payments for a much longer time, depending on the structure of your home loan. On the other hand, you're putting your home on the line if you can't repay the debts. The credit-savvy Fools on the Credit Cards and Consumer Debt discussion board have lots of opinions and experience with this tactic.
Include taxes in your decision making process
It's probably not a great idea to make all your decisions based on their tax consequences, but factoring taxes into your decisions can be a Foolish move. This can be a particular advantage when it comes to your investment decisions. Long-term buy-and-hold investors may see their tax bill stay relatively low. You'll also want to give some thought about whether to purchase certain investments through your taxable or tax-deferred accounts.
For much more on cutting your tax bill, check out the informative resources in our Tax Center, as well as the following Foolish articles: