The Internal Revenue Service is not the most popular government agency, especially this time of year. Yet there are a number of things you can learn from the IRS that can improve your financial situation.
The Internal Revenue Service is not the most popular government agency, especially this time of year. Yet there are a number of things you can learn from the IRS that can improve your financial situation. Here are five of them:
Buying a House is a Good Idea
No one likes paying more taxes than required, so it is a great deal that the IRS offers a mortgage interest deduction. This can save many families thousands of dollars in taxes each year. Home ownership is a proven way to build wealth. In most cases, a home's value goes up year after year. By the time you pay off your mortgage you have an asset that could be worth $200,000 or maybe much more. If you get a fixed-rate mortgage, your monthly principal and interest payments never change. If you rent, you can count on paying more over the years. Perhaps most important of all, when you retire and need to live on a lower income, a paid-off home eliminates a major living expense.
College is expensive, so every dollar counts when coming up with funds to pay for it. The IRS will give your earnings tax-free status if you set up a 529 education savings plan or a Coverdell Education Savings Account (sometimes referred to as an education IRA). You may also qualify for a $2,500 tax credit from the American Opportunity Tax Credit or up to $2,000 from the Lifetime Learning Credit. Don't pay any more than you need to for college expenses.
Health Savings Accounts
The continuing rise in health care expenses impacts most American households. While there are numerous reasons for this health care inflation, one of the causes is using a system where the patient has no reason to care what something costs because, after a small co-pay, it is being paid in large part by insurance.
With this type of structure, there is no incentive to control costs because the patient doesn't directly pay for it. An increasingly common health insurance choice is high-deductible health insurance combined with a health savings account (HSA). Using this type of insurance, you have to pay for 100 percent of all medical expenses until you reach your deductible. This forces you to be a more educated consumer and results in lower overall costs. Many people that use this type of plan come out ahead because the premiums are much lower and because funds deposited in your HSA can be tax deductible. So if you are in a 25 percent tax bracket, using an HSA means you get a 25 percent discount on the price you pay for your health care.
Most everyone is aware that you can take a tax deduction for donating cash to your church or the Red Cross. You may not be aware that you can also get a deduction for donating your used clothing and household items to Goodwill or other similar charities.
The donations must be in good used condition or better. You will also need a receipt to document the donation. You may also be able to take a deduction for mileage driven when giving service to a qualified charitable organization. That means the miles traveled taking the scouts to summer camp or participating in Meals on Wheels could be tax deductible.
Make Automated Payments
When federal income tax began in 1913, taxpayers would send in their taxes during the next tax year in quarterly installments. This changed in 1943 when the government started federal income tax withholding to better raise revenues to pay for World War II.
Today, most of us pay little attention to the money that is taken out of each paycheck to pay our taxes. We can use this same technique to build our emergency savings and retirement savings. Just instruct your bank to make an automatic transfer of the amount you choose each pay period to your savings account for your emergency fund and your retirement investment account for your retirement. You won't miss it if you have it moved with an automatic transfer before you get your take-home pay.
While these tips are unlikely to leave you with a warm feeling about the Internal Revenue Service, they can leave you in significantly better financial shape. The IRS knows its way around money, and you can too.