Tuesday, February 15, 2011

Saving Money on Taxes

This post is part of a multi-part series on Saving Money A to Z here at Frugal Follies.

Ah, taxes.  Don't you just love this time of year?

Here's what I do to save on taxes:

Because I'm nine years into a fifteen year mortgage, don't have a lot of unreimbursed health expenses, and have fairly low property taxes and no state income taxes, I generally don't have enough deductions to itemize my return.  So I'm stuck with the standard deduction each year, right?

Nope.  Instead, I lump my expenses which can be itemized into every other year.  For instance:
  • In odd years, I pay thirteen mortgage payments - I wait until January starts to pay January's payment (being sure not to send it after the deadline), and I pay next January's payment in December of that year.  In even years, I only pay eleven payments.
  • In odd years, I pay the current year's property taxes in January (my property taxes are not escrowed with my mortgage payment), even though the bill is sent in October. (The latest the taxes can be paid is March 31.) I pay the next year's property taxes in October.  In even years, I don't make a property tax payment.  I do pay a small penalty for paying my taxes in January rather than October, but this is small compared to the savings I will get.
  • If I'm going to make a large donation to charity, if possible I wait until the odd year to make it.
  • I donate more unused items to charity during the odd years.
Then, in the odd year, I have enough deductions to itemize.  But in the even years, I take the standard deduction.

How much can this strategy save?  This year's standard deduction for a married couple filing jointly is $11,600.  So if you have more than $11,600 in deductions, you would itemize; otherwise, you would take the standard deduction.

Suppose a couple has $10,000 in deductions each year.  But using my strategy, they're able to move $3,000 in property taxes, $400 in mortgage interest, and $1000 in charity deductions to the odd year.  So in the even year, they'd take the standard deduction, and save nothing.  But in the odd year, they'd have $14,400 in deductions, and itemize.  Assuming the couple is in the 25% tax bracket, they would save ($14,400 - $11,600) * .25, or $700.

Not bad for just a little shifting of when you pay your bills!

Turbo Tax
Another way I save is by doing my own taxes.  I use the TurboTax online version.  It's really easy to use, and the simplest tax returns are free.  If yours is more complicated, you pay when you file, not when you start using the software. 

H&R BlockAnother option is the H&R Block Home version.  The good thing about this version is that if you purchase the self-employed version of the software, you are also entitled to one free session with an H&R Block tax professional, so you can be sure that everything was done correctly.

For more frugal tips, please check out the bloggers listed on the left sidebar under Frugal Tips Linkups. There are lots of great ideas on each blog and I'm sure you'll find lots of wonderful tips!

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Coupon Teacher February 17, 2011 at 5:42 PM  

Nice ideas! Between our charitable giving and our mortgage, we can itemize, but I love the ideas!

Holly February 21, 2011 at 11:47 AM  

I'm going to show this to my husband, who does the taxes around here. Great plan!
Thanks for joining!

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