T minus seven days and counting... U.S. taxes are due on April 18 this year, and maybe those three extra days will help you find some last-minute tax deductions.
I know I'm going to be looking for them.
I've been writing for the Taipan Publishing Group for a number of years now, but in mid-2009, I moved to Milwaukee. Being so far out of the mid-Atlantic region, I could no longer be considered an employee. I had to be contracted.
This means no health benefits, 401(k) contributions, or paid sick and vacation days. It also means no employer contributions to taxes like FICA.
The government requires an employer to withhold and match 7.65% of an employee's wages if they make up to $106,800 for Social Security and Medicare. According to the IRS, the self-employment tax rate on income earned in 2010 is 15.3%.
That is double the tax rate that I had as an employee because now that I'm contracted, I'm considered both and employee and an employer.
(And by the way, the Self-Employment Tax is in addition to an income tax.)
No wonder, then that I was intrigued by a Wall Street Journal article titled, "A Tax Man Takes Account of His Life." It's about Mr. Doug Stives, a former partner in an accounting firm who has left that job to teach tax and accounting courses at a college.
"The Best of All Worlds"
But Mr. Stives has done something pretty spectacular when it comes to taxes...
The hook-line-and-sinker moment for me was the following excerpt:
In general, people who are employees and have side businesses are often in the best position to maximize the tax code's benefits, say experts. Mr. Stives calls this "the best of all worlds."
The result, says Mr. Stives, is that while he earns less than 75% of his earlier pay, he takes home almost 90% as much.
And Mr. Stives is a deduction maniac... Indeed, he reminds me of a new show on The Learning Channel called Extreme Couponing.
Here's one instance of Mr. Stives using his knowledge of obscure tax code to make the most of his money:
Mr. Stives chooses the locations for his seminars, most of which are sponsored by accounting groups. Often he opts for vacation destinations like Hawaii or Yellowstone Park. "People learn better when they are relaxed," he says.
Tax rules allow him to work for only three days of an 11-day trip and write off the airfare and a majority of other costs, he says. "To deduct the airfare, you have to spend more than half your working days on business, but travel days don't count, and neither do weekend days you wouldn't work anyway," says Mr. Stives. "So I can leave on a Friday, teach for three days midweek, and return the following Monday."
Sound like a game? It does to me, too...
And if you can afford to play it, it sounds like fun. But it seems to me that you have to actually spend money to owe less. For those of us making a livable wage, we're in the game. But if you're not, good luck getting off the bench.
But a lot of people fall in between these extremes.
(By the way, investing doesn't have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)
There are some legitimate deductions that you can make to maximize your tax return, or minimize your payments.
Here are a few that most people miss.
Child and Dependent Care Tax Credit
Lots of people claim their dependents, but taxpayers can claim some of the costs of daycare, after-school care, and even summer camps. And don't forget that adult dependents can be included in this tax credit.
This credit can give you as much as 35% of $3,000 in expenses for your child ($6,000 for two or more). There are stipulations, of course, such as your adjusted gross income and the age of your child. IRS Form 2441 can provide you with more information.
Retirement Savings Contribution Tax Credit
This tax credit was created for lower- to middle-income people who are contributing to their retirement plans. According to the IRS, a single person must make less than $27,750, and a married person filing jointly can't make more than 55,500.
If you meet these requirements (and some others spelled out here), than you can take a credit of up to $1,000 for those filing singly, and $2,000 for those filing jointly. See IRS Form 8880 for more details.
State and Local Income or Sales Tax Deductions
Did you owe state taxes in 2009? If you did (and you paid them) then you can deduct that payment from your 2010 taxes.
Also included in this deduction is state sales tax... You can't do both, but if you made some big purchases, then choosing to deduct taxes you paid through sales taxes might make sense for you. There are different forms, of course. If you're interested in learning more about sales tax deductions, check out the IRS's Sales Tax Deduction Calculator.
Otherwise, the IRS refers you to the Form 1040 Instructions for state tax deductions.
With only a week left, I'll be scouring my old receipts to find as many deductions as I can... And one other I will most certainly be using is the self-employment tax credit. The IRS allows me to deduct half of my self-employment tax, lowering my net income.
Be on the lookout for these types of hidden deductions... And if you come across any interesting ones, send them along to us. I'm sure there would be many more besides me interested in hearing what you've found!
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.