10 Tax Strategies for Individuals

1.	Maximize deductions. If you find you're not able to use all of your itemized deductions these days, you're not alone. Several of the deduction categories must meet thresholds before you can take any deductions. For example, you can only deduct medical expenses above 7.5% of adjusted gross income, miscellaneous and job expenses above 2%. Many taxpayers feel they are “wasting” deductions because they don't meet the threshold levels. One way around this is to bunch deductions, timing your discretionary expenses so you exceed the threshold one year but not the next.
2.	Minimize taxable income while saving for retirement. If you're an employee, make sure you are investing as much as you can afford in any 401(k) or similar deferred-income plan. Dollars put into these plans don't even show as taxable income on your W-2. You can also reduce your current-year taxes by making tax-deductible IRA contributions, if you qualify. If you're self-employed, use a Keogh plan, a SEP (simplified employee pension), or a SIMPLE (Savings Incentive Match Plans for Employees) to shelter income. You can also take advantage of these plans if you're employed, but have outside earnings from a sideline or home business.
3.	*Review investment strategies.* If you are in the higher tax brackets, consider investing in tax-free instruments such as municipal bonds. Compare the return with the after-tax equivalent you could earn from taxable instruments of the same risk. The tax law also favors growth stocks, where the reward comes from long-term capital gains, over income stocks which generate dividend income. Remember, however, that tax consequences alone should never drive your investment decisions.
4.	*Check taxability of social security benefits.* Social security recipients may benefit from strategies to reduce or defer taxable income. If your “provisional income” exceeds certain levels, it will trigger taxation of a higher percentage of social security benefits. Be sure to review the options available in your situation.
5.	Be charitable. One excellent tax-saving strategy to consider is donating appreciated property. For example, you may own 20 shares of stock worth $50 a share that you bought several years ago for $5 a share. If you sold the shares, the $900 difference between the current value ($1,000) and your cost basis ($100) would be taxed as a long-term capital gain. However, you can donate the shares to your favorite charity and take a deduction for the full $1,000 without paying any tax on the gain.
6.	Shift income to your children. Take advantage of your child's lower tax rates by shifting income from you to your child. This can be done by making tax-free gifts to your children and investing the money in their names. Beware: For children under age 14, the “kiddie tax” can mean that some of your child's investment income is taxed at your highest tax rate. If you have family-owned real estate or business interests, you might consider more sophisticated income-shifting techniques such as family limited partnerships.
7.	Review your interest expense. If you are paying any interest that is not tax deductible (such as interest on auto loans or credit cards), consider paying off the debt, or convert it to debt that will allow for deductible interest (such as a home-equity loan, where available).
8.	*Pay attention to recordkeeping.* Good recordkeeping can save taxes, particularly when you're determining gain or loss on the sale of mutual fund shares. Whether you make regular, periodic investments in mutual funds or simply make lump-sum deposits and reinvest all of the dividends, detailed records are imperative for determining your gain or loss. Good records and the right choice of cost-allocation method will minimize your tax bill. The IRS recognizes three major methods of calculating the basis (cost) of the mutual fund shares you sell: (1) the first-in, first-out (FIFO) method, (2) specific identification of shares, and (3) the average cost method. Choose the right method to minimize your taxes.
9.	*Watch out for the marriage penalty.* If wedding bells are in your future, beware of the marriage penalty. This is a feature in the tax law that causes some married couples to pay more tax than two singles earning the same amount of income. In some cases the marriage penalty is unavoidable (short of not getting married), but in other cases a little advance planning can save a sizable amount of tax.
10.	*Maximize your child care credit.* If you and your spouse are both employed at full or part-time jobs, make sure you get the maximum benefit from the child care credit. When calculating the credit, remember that you may be able to include the cost of day care, nursery school, babysitting, and summer day camp.