While nobody likes paying taxes, the Internal Revenue Service does offer simple ways to save thousands of dollars a year. Failing to take the time to not only understand these options but to plan ahead costs working families. Here are the top 5:
1) Failing to utilize your company’s 401(k) or 403(b) retirement plan:
For every dollar that is contributed to an employer-sponsored retirement plan – such as a 401(k), 403(b), or 457 plan – you will receive 10-25 percent back. You not only reduce your taxable income, but you won’t pay on the growth until you withdraw – hopefully at a lower tax rate.
2) Not contributing the maximum to your retirement:
For those taxpayers who are participating, consider increasing your contribution to the maximum that your budget will allow.
3) Not taking the time to record charitable donations.
Give to those in need, and Uncle Sam will reward your generosity with a tax deduction. Most taxpayers know that contributions, including cash and cleaning out your closet, may result in a deduction. Many taxpayers just don’t take the time to record all their donations and tend to undervalue what they do give away. Don’t know how to value the stuff? Check out It’s deductible for help with valuing your contributions.
Most taxpayers don’t participate in these programs simply because they don’t understand just how much they can save at tax time. For example, a family of four with a joint income of $100,000 could save $250 on every $1000 they contribute to their own retirement.
4) Don’t use your retirement savings as a cash account.
Avoid the temptation to use the money in your retirement to pay cash for items such as a car, a high interest credit card or to pay off your mortgage. If you are under 59, in most cases you will receive a 10 percent penalty on those funds that you take out in order to avoid paying car interest, etc. In addition, the state will assess a 33 percent penalty on the 10 percent federal penalty as well.
5) Don’t overuse your home equity. Pay slightly more with every mortgage payment.
Even though taxpayers receive a tax savings on mortgage interest, it is still only 15-25 percent for every dollar spent. If you make even one extra payment a year, you will slice 5.3 years off of your 30-year, 6 percent mortgage.
Convenient Tax Service is a family owned tax firm serving the Greater Milwaukee area since 1990. For more information or to speak to a tax professional, call (414) 817-1550 or visit www.cts1040.com.
