5 Tax Breaks That Might Save You Money

With the days before we should all have filed our income taxes dwindling away, I am about to undertake something rather ambitious: discuss some tax breaks and exemptions.

The reason I say “ambitious” is because the income tax code is a whopping 1.3 million words long, and that makes it twice as long as Tolstoy’s massive tome “War & Peace” (just a bit of interesting trivia I thought I’d share).

Now there are literally thousands of tax breaks, so I am going to discuss a few breaks that are the most likely to apply to you and your tax situation. And it is our right – and perhaps our duty to ourselves – to do as much as possible to limit our tax liability through appropriate use of the available tax breaks and exemptions.

You can choose to pay fewer taxes by managing your finances in a way to minimize your taxes. It is possible to itemize deductions including expenses for health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses. Throughout the year, keep track of all your itemized expenses so at the end of the year you have a clear idea what you can claim as exemptions.

With proper record keeping, you may find that you can take advantage of tax breaks/credits for things such as college expenses, saving for retirement, or for adopting children.

Here are 5 tax breaks that you may be able to take advantage of this year if you have not already done so:

Mortgage Exemptions

A new tax break in 2007 allows you to deduct your mortgage insurance premiums, in addition to any mortgage interest that you pay, on your 2007 tax return – assuming of course that you itemize your deductions and that your mortgage insurance policy went into effect after December 31, 2006.

Another tax break related to mortgages is the mortgage debt forgiveness, which means that if you had mortgage debt canceled/forgiven by your lender you will no longer have to pay income taxes on that amount.

IRA Deductions

In the past few weeks we have been talking a lot about IRAs, so you may know that while you cannot claim exemption for your contributions to a Roth IRA, you can for your contributions to a Traditional IRA (up to $4000 in 2007 and an additional $1000 if you are over 50).

You have until April 15th, 2008 to fund your 2007 IRA contributions so it is not too late to take advantage of any associated exemptions when you file your taxes.

The Energy Policy Act of 2005

Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, cooling and solar heating equipment in the home can receive a tax credit.

The amount of the credit and maximum value will depend on the energy-efficient improvement. As an example, you can receive up to $200 for installing energy-efficient windows in your home.

Dependents and Child Care

You are entitled to a $3,400 exemption per child against your taxable income for dependent children. Your child, even if he or she is over 18 and earning a pay check can entitle you to claim them as dependent, so long as you cover more than 50% of their expenses. The dependent must live in your home for more than half the year and be under the age of 19, or under 24 if a full-time student.

If you have to pay for child care or care of an elderly dependent while you are at work, you can claim deductions for payments you make beyond any amount that you already set aside in a flexible spending account. The maximum credit you may receive is a 35% credit on up to $3,000 in expenses for one dependent or $6,000 for two or more, with the amount of the credit decreasing based on your income.

Higher Education

You may be able to deduct certain higher education expenses even if you don’t itemize your deductions. Depending on your income, you may qualify to take a deduction on up to $4,000 in tuition and fees with the amount reducing to $2,000 as your income increases.

Be sure to evaluate all of the recent changes to the tax code as you prepare your taxes this year, as you may be able to take advantage of these tax breaks to save yourself some money.