By Thomas Arrison, Certified Public Accountant
Surprisingly enough, you should plan your taxes when you have been unemployed. This is especially true if you have just gotten a job.
The most prevalent motivation for planning your taxes is to legally minimize how much of your money goes to the IRS. Many years ago, Judge Landis of the U.S. Supreme Court declared that everyone had the right to legally minimize his or her taxes. To do this, you need to have an idea of what your income and deductions are now, and what you expect them to be next year. You must then move income and deductions in a way that minimizes what you pay in taxes this year. Sometimes it is worth paying taxes now in order to save even more in taxes next year.
However, ” take the money and run” is a valid alternative. In this case you worry about tomorrow tomorrow. You delay as much income as you can afford to next year and accelerate as many of your deductions as you can to this year. This way, you pay the least taxes possible.
Step One: Analyze your situation. Will you be paying taxes this year? If so what is your tax bracket? Are you in the 15% bracket or the 35% bracket? If you are in the lower tax bracket you will only get back $15 for every $100 you lay out for a deductible expense. If you are in the 35% bracket then the deduction gets more attractive.
Step Two: Determine where you think you will stand next year. Will you be in a higher or lower tax bracket? If you just got a job, then you probably will be in a higher tax bracket next year.
Step Three: Set your goal. Do you want money now or later?
Delaying income is tough whether you have a job or not. You get your salary or unemployment check. Your interest income or dividends is paid on a set schedule, so you cannot postpone them to next year.
Here are some ways to legally delay income to next year:
- Analyze your situation if you are thinking of selling some common stocks. If you have gains, you may want to wait until January to realize them. That way you are not liable for the taxes for a year. If you have losses, then take them this year. However, always make a good investment decision first. If it’s time to sell then don’t worry about the tax consequences.
Here are some ways to accelerate your expenses
- Pay your mortgage before Christmas. That way the bank will include the interest you pay in their annual statement, making it easier to deduct it.
- If you are making donations to your favorite charity, make them by the end of December, rather than in January. If you mail the check on December 31st, you can deduct it on your 2009 tax return.
- If you have a lot of junk, oops, I mean valuable furniture and other items; you can consider donating them to charity and getting a tax deduction for it. You must get a receipt if it is worth more than $250, and you must provide additional information on your return if it is over $500. Really valuable might require appraisal. Be careful, the appraisal might cost more than the tax benefit of making the donation. Generally charities will not value the items for you. They will just say that you gave them seven bags of clothing.
- Keep track of your job search expenses. They can be used as itemized deductions to reduce your taxes. Some examples of these expenses would be the cost of printing your resume, fees for help in your job search, or hiring a coach to help your efforts. However, they must be above 2% of your income to reduce your taxes.
- Often the biggest job search expense is the use of your automobile for your search. Keep track of the mileage for getting to the printer, going to various employment agencies or job fairs, and traveling to interviews. Write it all down to make sure you get the benefit of all the mileage.
- If you pay your real estate taxes yourself rather than through a bank’s escrow account, you can pay them in December rather than January. That way you can deduct them this year.
- Medical expenses must be more than 7.5% of your total income to be deductible. Look at your income and medical expenses and pay any outstanding medical bills this year if you are over this limit. If you are paying for your own health insurance., it should be not be a problem exceeding this limit.
Careful tax planning can help you keep some of your money at a time when every dollar counts.
These are general ideas that can help reduce your taxes. If you plan to implement any of these suggestions, it’s worth it to consult a tax professional.
About Thomas Arrison
Thomas has been a CPA for over 30 years. Since 1992 he has provided individual and business tax and accounting services at Arrison & Olden, PC in Littleton, MA. He also has his own blog, Thom’s Tax Talk, a compendium of tax tidbits and information
