Tips on Reducing Your Tax Bill

10 Tips on How To Cut Your Income Tax Bill ( from NY Life )

Before you file your 2008 income tax return with the IRS, review these ten tax tips. Between some tax deductions here, and a tax credit or two there, you could shave thousands of dollars off your tax bill. So, do your homework, and be sure to talk to your accountant or other tax advisor to make sure you qualify.

Start With Tax Credits1

See if you qualify for any of these four tax credits. (A tax credit is powerful money. It lets you deduct the amount from your tax bill … not just from your taxable income!)



1. Earned Income Tax Credit: You may have not been eligible in the past. However, if your income decreased in 2008, this credit, worth a maximum of $4,824, is worth a second look. Even if it didn’t, the IRS says that a quarter of all eligible taxpayers fail to take this credit2.

2. Child Tax Credit & Personal Exemption: If you have minor children, you may be eligible for an additional $1,000 credit on top of the regular $3,500 exemption you can claim for each dependent. Adults can also claim $3,500 each as a personal exemption. There are income limits and other qualifying criteria3.

3. First-Time Homeowner Credit: This is really a no-interest loan from Uncle Sam. If you bought -- or will buy -- a home on or after April 9, 2008, and before December 1, 2009, and didn't own a home during the three years preceding the purchase, you may be eligible. For qualifying purchases made in 2008, the maximum amount of the credit equals either 10% of the home's price or $7,500 ($3,750 if you are married, but filing separately), whichever is less. One hitch: You must repay the “credit” over 15 years by either owing more in taxes or receiving a smaller refund.

4. Recovery Rebate Credit: If (A) you didn’t qualify for the full $600 or $1,200 from last year’s Economic Stimulus Act and (B) if your income changed substantially between 2007 and 2008, you may now be able to collect that money. Worth finding out.



Savings & Tax Deductions

The government also offers opportunities to reduce your taxable income by deductions. These include the following:



5. Your 2008 IRA Contribution: You have until April 15, 2009 to contribute up to $5,000 each for you and your spouse for 2008 (add another $1,000 for each person age 50 or older). If you contribute to a traditional IRA, you may be able to deduct all or a portion of that amount, depending on whether you participate in an employer-provided retirement plan and your adjusted gross income. If you contribute to a Roth IRA, however, you cannot deduct your contributions (though all your qualified distributions will be received tax-free). A “qualified distribution” is any distribution from a Roth IRA that meets the following two tests:
Five-Year Test: The five-year test is satisfied beginning on January 1 of the fifth year after the first year for which you made a contribution to a Roth IRA. If you made your first Roth IRA contribution for 2004, for example, any distribution from a Roth IRA will satisfy the five-year test if the distribution occurs on or after January 1, 2009.
Type of Distribution: Even after you meet the five-year test, only certain types of distributions are treated as qualified distributions. There are four types of qualified distributions:
Distributions made on or after the date you reach age 59½
Distributions made to your beneficiary after your death
If you become disabled, distributions attributable to your disability
"Qualified first-time homebuyer distributions"
6. Your 2009 IRA Contribution: You have until April 15, 2010, to make this contribution. You can make it in one lump payment then, or you can spread it over the next 12 months.

7. Kiddie-tax Limits: For 2008, a child under age 19 (or 24 if a full-time student) can earn up to $1,800 in investment income (up $100 from 2007). Above that amount, earnings are taxed at the parent’s rate.

8. Real Estate Tax Deduction: There is an additional standard deduction for those who don’t itemize their deductions, but pay real estate taxes. The additional deduction amount is equal to the amount of real estate taxes paid, up to $500 for single filers or $1,000 for joint filers. This deduction is available for the 2008 and 2009 tax years and increases your standard deduction.

9. Tuition and Fees Deduction: You may be able to deduct qualified tuition and required enrollment fees up to $4,000 that you pay for yourself, your spouse or a dependent. You do not have to itemize to take this deduction. However, you cannot take both the tuition and fees deduction and education credits (Hope & Lifetime Learning Credits) for the same student in the same year. Income limits and other special rules apply.

10. Taxpayers over age 65: Married taxpayers can add $1,050 to the regular standard deduction and singles will get an additional $1,3504.


Two More Things to Remember

First, the above contains general tax concepts only. Before doing anything, please talk to a qualified tax advisor.

Second, if you need info and ideas about IRAs,Individual 401ks, annuities, municipal bonds, and other tax-advantaged investments, please get in touch.

1Tax Credits Worth Pursuing This year, SmartMoney.com (January 2009)
2Ten Things You May not Know About the Earned Income Tax Credit, Internal Revenue Service (January 2009)
3A Sneak Peak at 2008 Tax Savings, MSNBC.com (9/27/07)
4IRS Reminder: Make Use of Recent Tax Law Changes for 2008…Internal Revenue Service, IRS.gov (December 2008)
*Issued by New York Life Insurance and Annuity Corporation (A Delaware Corporation)