Want to Loosen Uncle Sam's Grip on Your Wallet?

 by: ARA Content

Talking About Money

With Jim Larranaga

(ARA) - The average person pays more than $6,000 in federal income tax, according to the Congressional Budget Office. If you cringe at sending a big chunk of change like that to Uncle Sam, you may be looking for ways to keep a little more jingle in your pocket. I'll give you some tips, but, like me, you should consult a tax advisor before taking steps that could affect your tax status.

Maximize deductions

Give to charity. Support your favorite cause or clean out the attic and donate items you don't want to charity. Be sure to get a receipt for donations exceeding $250.

Deduct qualified medical expenses. Consider scheduling elective medical and dental procedures if you think your bills will pass the threshold for deducting medical expenses (7.5% of your adjusted gross income). Don't forget, long-term care insurance premiums may qualify for the deduction.

Add up miscellaneous expenses. These and many other costs may be deductible if they exceed 2 percent of your adjusted gross income: union dues, subscriptions to professional journals, tax preparation fees, costs for a uniform you wear at work, expenses incurred looking for a new job and continuing education expenses.

Plan for Your Retirement

In addition to being a great way to save for retirement, employer-sponsored retirement plans, such as 401(k)s, offer savings on your current income taxes. Generally, the money you contribute to your plan is taken out before taxes, so your taxable income, and thus your tax bill, is lower.*

If you're eligible to make deductible contributions to a traditional IRA, the same principle is at work.* But instead of making pre-tax contributions, you make a contribution with money that's already been taxed, then claim a deduction for the amount on your income tax return.

Accept Your Losses

If you have both winners and losers among your investments, you might consider selling some losing investments to offset the capital gains of the winners. Capital losses can be used to offset capital gains, dollar for dollar. In addition, you may use up to $3,000 of losses to reduce your ordinary income. If you have losses exceeding $3,000, you can carry them forward and apply them to next year's taxes.

Be Smart about Higher Education Costs

The Taxpayer Relief Act of 1997 created a number of tax-advantaged ways to pay for college. Many of these tax benefits are subject to income limitations and, in some cases, may not be combined.

Education IRAs, set up for children under age 18, offer potentially tax-free growth.

The HOPE Scholarship Credit or Lifetime Learning Credit may help you lower taxes with a tax credit.

Deducting interest paid on a student loan is another possibility.

Withdrawals from a traditional IRA before you reach age 59 1/2 are allowed without the usual 10 percent penalty if you use the money to pay higher education expenses.

Since tax laws are complex and change frequently, it's important to consult a tax expert to help you plot a strategy for trimming your tax burden.

* Taxes will be due upon withdrawal at ordinary income tax rates. Withdrawals made prior to age 59 1/2 may be subject to an additional 10% penalty.

Jim Larranaga is Executive Vice President of Priority Publications, a Minneapolis-based publisher of financial newsletters.