If you wish to minimize your tax liability, it’s critical to have a thorough knowledge of how taxes work. Whether you employ a tax preparer, a financial software program, or simply complete the paperwork yourself, familiarity with tax credits, deductions, even record keeping requirements, can all make a difference in the amount of your tax bill.
Collecting your receipts should be your first step, also keeping in mind any charitable giving you have done in the past year. This not only includes donations of clothing and toys, but also the value of miles you drove in order to volunteer for charity.
The fourth most common deduction taken by taxpayers is that of charitable contributions. In 2005, the IRS reported $172 billion deductions to charity, and the number has grown in recent years.
If you donate to a favorite charity and intend to include your gift as an itemized deduction, record keeping is more important than before. While the old guidelines only required a receipt for single cash donations of more than $250, the new rule is that you must furnish proof of payment, such as a written receipt or bank record, for any cash contribution, regardless of amount.
The IRS has recently changed the requirements for claiming a tax deduction for donations of worn items, like clothing. To be able to claim the 25% of the original price, as allowed by the IRS for items donated to a thrift shop, the items you donate must still be in “good” condition. You are not allowed to donate clothing that would find its best use as rags and receive a tax benefit for that donation.
You can also save money on your taxes by contributing to tax-exempted 401ks or other retirement accounts. The amount you contribute is often eligible for deduction from your taxable income, though there are obviously income limits in many cases. Simply make sure you’re aware of the rules and policies regarding the retirement account before you make a contribution.
Also, you may want to consider the gift tax exclusion. This is when one person gives another person a gift worth up to $12000, which is tax-free. If the gift is worth more than $12000, only the first $12000 of value is tax-free. It’s fairly common for parents or grandparents to give such gifts, and to take the tax deduction that goes along with this family gift. When this happens, the person that gets the gift doesn’t have to fill out any forms, or report it on their taxes. This is a very simple way for a parent or grandparent to save money on their taxes, and to help our his or her child or grandchild.
Naturally, you should still check with the IRS for official policies, the best place to do this being the IRS website. One source for interpretations of these rules is a web site from a tax software vendor.