Unemployment and Income Tax Savings
Reducing your Effective Tax Rate
You need not be unemployed to learn about income tax savings
In order to save on income tax, a household must have SOME earned income or unearned distribution. You have no motivation to save on taxes if you have no taxes to pay (in certain cases, Earned Income Tax Credit can increase the tax refund). For example, if you (and your spouse) are under 65, then you have no tax liability if you make less than these gross incomes in 2012:
- Single - $9,750
- Head of Household with one dependent child - $16,300
- Married couple with no children - $19,500
- Married couple with one child - $23,300
- Married couple with two children - $27,100
• Tax components are composed of: Income, Deductions, Credits, and Withholding
So if you earn more than above amounts, the following suggestions MAY apply to you.
• Decrease Adjusted Gross Income
- Decrease income, pension distribution, taxable interest, dividend, and capital gains, business income
- Increase tax adjustments (teacher supplies, tuition deduction, etc.)
- Shift from higher to lower tax bracket (25% to 15%, or 15% to 10%)
- Increase contribution to 401(k), FSA, Cafeteria plan, HAS, IRA, SEP, Tax deferred annuity
- Uniform gift to minor’s act – Transfer up to $13K to a minor child who is in the lower tax bracket
• Increase deductions (more on next post)
- Increase property tax, mortgage interest payments, medical, miscellaneous expenses, and charitable donations
- Increase number of dependents – have more babies or adopt a child. Affects personal exemption and (if under 17) child tax credit
• Increase tax credit amount
- Child tax credit (MAGI < $75,000 for single and HoH, and < $110,000 for joint filers)
- American Opportunity Tax credit (MAGI < $80,000 for single , < $185,000 for joint filers)
- Saver’s credit – up to 50% back as tax refund (MAGI < $28,750 for single filers , < $42,375 for HoH, < $57,500 for joint filers)
- HoH = Head of Household with a dependent
• Optimize tax withholding – Plan your taxes so that you can break even on December 31. i.e. small tax refund or tax payment.
Next post will discuss Increasing tax deduction
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Comments: 1
A taxpayer was lamenting one day in December the fact that every year, he came very close to reaching the standard deduction amount, but he could never exceed it to take advantage of tax deductions. So I suggested that he pay his $4K property tax, not in January of the following year, but in December. He already paid last year's property tax in January (11 months back). So he basically doubled his property tax payment in one year.
He was in the 25% tax bracket, so as a result he received $1,000 more in tax refund by spending 5 minutes to pay the property tax online. He was one happy camper.