By Victor Antonio
When working with families I remind them to take certain steps to reduce their expenses or taxes. They always respond, “I know. I know.” and then proceed to give me some excuse as to why they haven’t done it. I remind them of the old saying, “To know and not do is the same as not knowing.” So here are 5 things you can do to reduce your taxable income and keep more of your hard earned money in your pocket.
1. Retirement Savings = Lower Taxable Income
During the year, one of the best ways to reduce your taxable income is to fund a retirement account or increase your contribution to one. By putting money into a traditional IRA and 401(k) plan, you reduce the amount of money you’ll get taxed on. Also, I highly recommended that you max out your contributions, to a 401(k) for example, to the employer’s matching limit if you can afford it.
2. Deduct Your Job-Hunting Costs
If last year you were looking for a job in the same line of work or field, you can deduct those job-hunting expenses on your taxes. And yes, qualifying expenses can be written off even if you didn’t get hired for a particular position. These expenses can include, but are not limited to: transportation (mileage, airfare) and fees (tolls, fares, parking) to and from the interview, lodging if you had to stay overnight, food, printing costs for resumes and business cards, postage, online job-hunting services, and so on. Make sure you track down all the expenses you incurred because they can add up to a substantial amount. Note: If you’re job-hunting for the first time these expenses do not qualify for a tax write-off.
3. Deduct You Moving Costs
Sometimes finding a new job will require you to move to a new city or town. If you land a new job that’s at least 50 miles farther from your home than your previous job was, you can deduct those moving expenses as long as your new employer isn't reimbursing you for them.
4. Home Office Write-Off
If you are self-employed or use a part of your home for a home office, you may be able to deduct expenses such as: mortgage interest, utilities, insurance, Internet and/or phone services. There are two ways to estimate the amount you can write-off. First, if for example you have a 3 bedroom home and you use one room strictly as an office, you may be able to deduct a one third (one of three rooms) of those qualifying expenses. Or, you can take a $5 deduction per square foot of your home office, up to 300 square feet, for a maximum $1,500 deduction.
5. Reduce Taxable Income for the Self-Employed
If you’re self-employed, have no employees and need a way to reduce your taxable income, Simplified Employee Pension (SEP) plans are a type of tax-deferred retirement savings plan for the self-employed and small business owners. With a SEP, a business can make tax-free contributions to an individual retirement account using tax-deductible dollars. Self-employed persons can contribute up to 20% of their net self-employment earnings towards their own account but are limited to a maximum dollar amount of $52,000 per plan participant for year 2014. Here’s the best part; the plan can be adopted as late as the due date of the tax return for the tax year in question which means you can decide to contribute at the last minute before submitting your taxes.
Lastly, I’ve given you a few ideas to reduce your taxes and keep more of your money. I strongly recommend you get together with your tax advisor to discuss and confirm the above options, as tax policies change constantly, and also to explore what other write-offs or tax reduction tactics might be available to you. The more you know, the more money you can keep.