Each year, thousands of tax filers miss deductions to which they were entitled simply because they failed to know the federal income tax law. There are many ways to save on your tax bill, but you must understand the federal income tax laws as they apply to you. Here are some of the allowable deductions allowed under federal income tax law.
You Can Reduce Your Tax Bill By Saving for Retirement – We all know we need to save for retirement, but not everyone is aware that saving for retirement is also a great way to save on taxes right now. By saving for retirement, you’re reducing your adjusted gross income, thereby reducing the income you have to pay taxes on. Any money contributed to a 401k is contributed on a before tax basis. In addition, money you contribute to a private IRA can be deducted at the end of the year. Federal income tax law does, however, have limitations on the amount you can contribute tax free each year.
Get a mortgage – Owning your own home is one of the biggest tax savings opportunities. The interest you pay on your mortgage is tax deductible, and in the first few years of a mortgage, most of your house payments go to interest, so you can save a bundle. If you already own your home, but have other debts, like a car payment or credit cards; consider taking out a home equity line and using the money to pay off those other debts. According to federal income tax law, just like a primary mortgage, the interest you pay on your home equity loan is tax deductible, but the interest you pay on credit cards and car loans is not.
Go green – According to federal income tax law, many of your energy efficient purchases come with tax deductions. When you purchase home products, like replacement windows or a hot water heater, be sure they come with the government’s energy star rating. Items with the energy star rating are subject to tax deductions of about 10% of the purchase price in most cases. Replacement windows, however, have a maximum deduction of $200, regardless of the cost. Purchasing energy efficient cars, such as hybrids, qualify for tax deductions too. And, just think, in addition to the money you’re saving on your taxes, these energy efficient products will save you money every year.
Contribute to Charity – Charitable donations are tax deductible. And the federal income tax laws regarding charitable donations don’t just apply to cash donations, either. When you donate items like clothing and household items to charities that accept them, you can donate the value of the items donated. Just be certain to get a receipt for your tax records.