Nobody really likes paying taxes, but everyone wants good roads, clean water and a safe environment in which to raise their families. The money to pay for all those government services has to come from somewhere, and part of that "somewhere" is your paycheck, in the form of the federal income tax. Although you are obligated to pay your fair share, you don't want to pay more than you owe, either. Legitimate tax write-offs can help lower your income tax bill.
Standard Vs. Itemized Deductions
The IRS allows you to reduce the amount of your taxable income by either itemizing your deductions or by claiming the standard deduction. Most people claim the standard deduction, because it is easier to figure, and it often provides a larger write-off. If you paid a lot of money in mortgage interest, or had extraordinary medical expenses, however, you might be better off itemizing your deductions. The IRS recommends figuring your taxes using both methods, then filing your tax return using the method that gives you the biggest write-off.
If you elect to itemize your deductions you can write off many types of expenses such as mortgage interest; employee business expenses; miscellaneous expenses -- union dues, for example; medical and dental expenses; charitable contributions; education expenses; and casualty losses. You may also deduct certain taxes, such as your real estate taxes and your state and local income taxes. Miscellaneous expenses, and employee business expenses, including business use of your home or car, are limited to the amount that exceeds 2 percent of your adjusted gross income. Your medical and dental expense write-off is limited to the amount that exceeds 7.5 percent of your adjusted gross income for the 2012 tax year. The itemized deduction for education expenses only applies to work-related education.
Early Withdrawal Penalty
Certain types of interest bearing products, such as bank certificates of deposit, require you to leave your money on deposit for a specified period of time. If you withdraw your money before maturity, the bank might charge an interest penalty. You can reduce your taxable income by the amount of this early withdrawal penalty by including it on Line 30 of IRS Form 1040. Don't mistake this deduction with tax penalties on early withdrawals from your individual retirement account. Those early withdrawal penalties are not deductible.
Individual Retirement Account
You can reduce the amount of your taxable earned income by contributing to a traditional individual retirement account. Contributions to your traditional IRA reduce your taxable income on a dollar-for-dollar basis, up to the maximum allowed by law. The maximum varies based on your age. For the 2012 tax year --assuming you qualify to contribute to a traditional IRA and take the full write-off -- you can write off up to $5,000 if you are younger than 50 year, or $6,000 if you are between 50 and 70. You can't make deductible contributions to your traditional IRA once you reach age 70 1/2 years. While Roth IRAs have their own special tax advantages, you can't write off contributions to a Roth IRA.
If you have invested for the long-term, you've seen the prices of your stocks rise and fall, but the overall historical trend is up. Even if your investment strategy is buy-and-hold, it might be worth your while to sell some of your poorly performing investments at a loss to offset any capital gains you might have earned. If you have more losses than gains, you can also deduct up to $3,000 in capital losses from your other taxable income.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.