It's the last week of the year, and it's your last chance to take advantage of some last minute tax deductions for 2009. If you're anything like me, you'll want to make sure that you do anything you can to lower your tax bill this year.
10 Tax Credits And Tax Deductions
- Increase your retirement account contributions: Max out the contributions to your 401k, 403(b) or IRA to lower your taxable income. With an IRA you can contribute up to$5,000, $6,000 if you are 50 or older. For a 401k or 403(b) the contribution limit is $16,500 , or 22,000 if you’re 50 or older.
- New car sales tax deduction: If you bought (or buy) a new automobile in 2009 you can deduct any state and local sales and excise taxes on that purchase from from taxable income. Details here and here.
- Write off investment losses: If you have lost money on your investments, you can deduct up to the $3000 in investment losses against normal income each year if your losses exceed your gains. Also known as tax loss harvesting.
- First time homebuyer tax credit: There is a $8000 tax credit for first time homebuyers that buy a house in 2009. The credit can be used in 2010 as well as the credit has been extended and is good on houses under contract by 4/30/2010. Details here.
- Homebuyer tax credit for current owners: There is a $6500 tax credit for homeowners that buy a new house, when they have lived in their current house for 5 consecutive years out of the last 8 years. Details here.
- Home Improvement Tax Credits: You can claim up to a $1500 tax credit for certain energy efficient improvements to your home. Details here.
- Make tax deductible donations to charity: You can claim a deduction for certain eligible donations to charity. Make sure the charity is legitimate!
- Tuition tax breaks: You can claim a deduction for education expenses incurred including tuition and related expenses. A maximum of $1800 per eligible student.
- Deduct medical expenses: If you've had a lot of medical expenses during the year, you can deduct the amount of your medical and dental expenses that is more than 7.5% of your AGI. Details here.
- Prepay your mortgage or real estate taxes: You can prepay your mortgage or real estate taxes, even if they're not due until January. You can then deduct them on your 2009 taxes!
- Bonus Tip – Challenge your property taxes: If you haven't checked to see the value your county has assessed your property at, you may be paying too much in property taxes. Appeal your property taxes and save hundreds per year. Detail on how to do it here: Challenge property taxes.
Tax Deductions Versus Tax Credits: What Is The Difference?
One thing that's important to remember when you're doing your taxes is the difference between a tax deduction and a tax credit.
Generally a tax deduction will allow you to reduce the amount of taxable income that you have in that year. A tax credit will allow you to actually reduce the amount of taxes that you pay. So usually a tax credit will mean a bigger reduction in your taxes.
For example, if you have $50,000 in taxable income and you're in a 25% tax bracket, here is the difference between a $1000 deduction and a $1000 credit. If you have a $1000 tax deduction – you would then have $49,000 in taxable income – and you would pay $12,250 in taxes. If you have a $1000 tax credit you would then pay $11,500 in taxes. That's a big difference!
Are there other tax credits or tax deductions that you think people should remember this year when filing? What tax deductions and credits are you taking advantage of this year? Tell us your thoughts in the comments!