Money Matters:  Taxes


By Ginita Wall, CPA, CFP

Taxes are, unfortunately, a part of every financial decision. Like it or not, Uncle Samís greedy fingers reach into your pocket with every paycheck and each dollar of investment earnings.

The booklet includes tax tips for eight major life events, including going to school, beginning a job, becoming a family, business ownership, divorce, and retirement, plus bonus sections on tax troubles and year-end planning.


  1. Withdraw penalty-free from your traditional IRA to pay higher education expenses for yourself, your children, or grandchildren. Youíll have to pay tax on the withdrawals at your regular income tax rate, but no early withdrawal penalty will apply.
  2. File a tax return every year you are due a refund. If your earnings are so low that you are not required to file, youíll need to file a return in order to claim a refund of withheld income taxes. If you wait more than two years to file, the IRS is not required to issue you a check.
  3. Keep track of the cost of books and equipment you purchased while in school. When you begin working, you may be able to depreciate those items that you use for your career.
  4. The Working World

  5. Start investing in 401(k)s, stock purchase plans, employee stock options, and other tax-advantaged accounts as soon as possible. Small contributions made at an early age are much more valuable than large contributions made a few years before retirement.
  6. Learn about your companyís fringe benefits. Large employers often have tuition assistance plans, free employee counseling, mass transit commuting assistance, and other tax-free perks that might not be common knowledge around the water cooler. Visit human resources for a chat about what your company offers, or check out your companyís website.
  7. Consider paying your own disability premiums. If you become disabled, your disability benefits will be tax-free. If your employer pays your premiums as a tax-free perk, disability benefits will be taxable when received.
  8. Only borrow from your 401(k) in an emergency. You have the option, if you really need the money, to borrow these funds without taxes or penalties. However, the interest you pay on the loan wonít be tax deductible, and you will miss out on the capital appreciation of the money if youíd left it invested it for growth in the plan.
  9. Family Life

  10. Set aside money in your employerís dependent care plan. Although tax-free reimbursements by your employer reduce the child and dependent care credit you are allowed to take, they are still a good deal for taxpayers in the 20 percent tax bracket and above.
  11. Claim the child tax credit. If your income is under $75,000 ($110,000 for joint filers) you are eligible to receive up to $500 for any child, stepchild, grandchild, adopted child, or foster child in your care.
  12. Claim the adoption tax credit when you adopt a child, if your income is under $115,000. You can claim a tax credit of up to $5,000 ($6,000 for a special-needs child) for adoption fees, attorney services, court costs, and other expenses in the year the adoption is final.
  13. If necessary, withdraw from your traditional IRA to meet medical emergencies, for education, or to buy a home. You can withdraw money from your IRA penalty-free (but not tax-free) before age 59-1/2 to pay for medical expenses that exceed 7-1/2 percent of your income, to pay for health insurance premiums if you are unemployed, to pay for higher education expenses, or to pay up to $10,000 of first-time home-buying expenses. If you desperately need money for one of these qualified expenses, your IRA is a place to start.
  14. Divorce

  15. Before your divorce, find and copy all business tax returns for your spouseís corporation or partnership. The IRS will not give you copies of your spouseís business returns if you did not sign them.
  16. When in doubt about how to file, consider a separate return. This ensures that you will not be held liable for the actions of your spouse, if she omits income or overstates expenses. But even if you file a joint return, the innocent spouse provisions of the tax law will protect you if you werenít aware of the misstatements on the joint return.
  17. Consider the tax implications of support. Child support is not deductible, but alimony is. Calling child support "family support" makes it fully taxable to the recipient and deductible to the payer, just like alimony. Do not characterize the payments as "family support" unless you will end up with more money after taxes are paid.
  18. Follow the 5Ds for alimony deductibility. If you want a deduction for the alimony you pay (it will be taxed to your ex), it must be paid in dollars, under a decree or written agreement, and cease on your exís death. After the divorce, you must maintain your distance (you canít live with your ex), and the payments canít be designated as non-taxable or child support.
  19. Keep a calendar of the days (and nights) your child spends at your house and at your ex-spouseís. This will provide documentation for the courts and for the IRS (for dependency exemptions and head of household filing status), and also help you avoid disagreements with your ex-spouse about what really happened on a particular day.
  20. Business Ownership

  21. Deduct 100 percent of the health insurance premiums for your entire family instead of just 60 percent. If you employ your spouse in your business, you may cover him and deduct the entire premium as an employee benefit. As a self-employed taxpayer, you can deduct only 60 percent of the health insurance premiums you pay on your own behalf.
  22. Deduct an office in your home. If you regularly and exclusively use part of your home to perform administrative or managerial activities for your business, you can claim a home office deduction for utilities, rent or mortgage interest, depreciation, phone use, cleaning, and the like. You can still take this deduction even if you provide products or services at other locations.
  23. Read more. Subscriptions, books, and other materials related to your field are tax-deductible items. Ditto conferences, seminars, and courses related to your work.
  24. Use consulting agreements when you buy or sell a business. For example, if the buyer hires the seller on an exclusive contract, the seller will be able to set up a Keogh plan, as well as deduct ordinary and necessary business expenses. The buyer will get a current tax deduction for salary paid to the seller.
  25. Home Ownership and Investing

  26. Deduct personal bad debts. If your best friend borrows $10,000 and then skips town, you can deduct this non-business bad debt as a short-term capital loss on your tax return.
  27. Donít fall for tax evasion schemes such as revocable foreign trusts or secret offshore bank accounts. There are plenty of legitimate ways to reduce your income taxes, so donít fall for shady deals sold in the backs of magazines or over the Internet.
  28. Own your own home. Home ownership is one of the last tax shelters available to the middle class. Mortgage interest and property tax deductions will save you taxes, and saving to own a home is a wonderful use for your money after you have contributed the maximum to tax-advantaged retirement plans.
  29. Deduct points paid on your home loan. Points paid when you acquire your home are deductible in that year. Points paid to refinance a loan must be written off over the length of the loan (1/30 each year on a 30 year loan). If you refinance again, donít forget to write off the remaining unamortized points in the year you refinance.
  30. Contribute to your IRA early in the year. Although you have until April 15 of the following year to contribute, your money will have 15-1/2 more months to grow if you contribute on January 1 of the previous year. Over a lifetime, this additional compounding will greatly increase your retirement nest egg.

Excerpted from:
150 Ways to Save Taxes Through Lifeís Transitions,
By Ginita Wall
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This Article 25 Ways to Save Taxes Through Life’s Transitions was written by Ginita Wall, CPA, CFP