How to save money on taxes

I was working on a totally different post for today, but it's going to have to wait, because after reading some of the comments on my post yesterday, there's something that I want to advocate and what better platform for advocacy than a blog, right?

Anyway, here it is, plain and simple: Inform yourselves about your finances.

This is advice that I'm only just starting to take on my own. As I said yesterday, my financial situation has changed quite a bit over the past year. I've gone from being a single, fairly low-earning renter in a very standard position working in an office to... well, the opposite of that. I'm married. There are two incomes. There are different states to deal with. I own a house and a car. I'm paying off a very expensive surgery. I work from home. As a homeowner, I am investing in things that I never even thought about before, such as windows and washing machines.

And as I do all this, I have been lucky enough to encounter people who have offered me incredibly helpful advice. I learned a lot about finances through the mortgage application process, and now I'm in the process of learning a lot about taxes.

For me, before, taxes were a murky thing. I filled out the form, double-checked my work to make sure I had done the math right, and didn't really know what it was that I was paying for. Which was fine, because things were simple: I had a taxable income, and so I paid tax on it. All of it, other than what was deducted for health insurance costs. Now there are so many more variables.

I had no idea about the tax deduction for health costs, but the woman who manages the billing for my surgeon's office told me about it.

I had no idea about the tax credit for energy-efficient windows, but my parents just replaced a couple windows in their own house and they told me about it.

I had read something about a tax credit for first-time homebuyers, but I didn't think about it until we bought a home ourselves, and then I looked up more information.

I had no idea about the water refund for a high-efficiency washer until our realtor told us about it.

I knew, I believe, that mortgage insurance could be deducted from your taxes, but I hadn't thought about that either until my parents reminded me.

I had no idea that the costs of working from home were tax-deductible until my boss told me.

What I'm saying is, I am lucky to be surrounded by people who are more informed than I am (they are the kind of people I consider to be real adults, as opposed to the pseudo-adult that I am). But even if you don't have these kinds of resources, you can inform yourselves, thanks to this little thing called the Internet.

There are so many things that we pay for that our government encourages us to do by making them tax-deductible. That's quite a bit of money you could save. For those of you who don't pay much attention to taxes, here's a breakdown of the difference between a tax credit and a tax deduction (and my apologies if I'm just repeating information that everyone already knows).

A tax credit (such as what we'll get for buying our house and replacing our windows) is basically a cash handout from the government. For buying our first home in 2009, we get $8,000 credited toward our taxes. However, since we pay our taxes in full over the course of the year, this means that we will basically get $8,000 added toward our tax refund. So if we would normally have gotten a $200 tax refund, instead the check from the IRS will be for $8,200.

A tax deduction, on the other hand, means that money that you've spent can be subtracted from your overall taxable income, lowering the amount of tax you have to pay, the same way that health insurance and transportation costs are deducted. So say you earn $50,000 per year, and spend $2,400 per year on health insurance. This means that your taxable annual income is now only $47,600. Assuming that you give up about a quarter of your income to taxes, those deductions save you about $600.

Now, insurance is a basic deduction that most people don't really have to worry about, because your employer will calculate that for you on your W-2 so the taxable income listed there will already have taken the cost of health insurance into account. But there are so many other deductions you can take. You can deduct charitable donations, student loan interest, mortgage interest, health care costs in excess of 7.5% of your income, and the list goes on.

Update: Kristie points out, quite accurately, that commuting costs are not tax-deductible. However, employers have the option of providing a benefit to their employees wherein you can purchase transit fare directly from your paycheck, pre-tax, up to $230 per month. This is apparently especially common in big cities with good public transportation systems, and is absolutely worth checking with your employer about. If they don't offer it, and enough people ask, maybe they will start!

So let's take the health care costs as another example. You can only deduct anything you spend in excess of 7.5% of your annual adjusted income (adjusted includes any exemptions and deductions you can claim--and everyone who is not a dependent can claim at least one exemption as well as the standard deduction, if you end up not itemizing--as well as other pre-tax costs like health insurance).

Let's assume that your adjusted gross income is $50,000. If you spend more than $3,750 on health-related costs in a year, you can deduct anything beyond that amount from your taxes. So say you have a bad year and you have a surgery that costs you $5,000 out of pocket. You can deduct $1,250 from your taxable income, meaning it would now be only $48,750, saving you a little over $300.

And that's not even taking into account any other health costs you spend over the year. You've already spent that 7.5% of your income on your surgery, so any other health costs can also be deducted. So if you spend another $500 on prescriptions, office visit co-pays, etc., during the year, now you can deduct a total of $1,750 from your taxable income, meaning it would now be $48,250, saving you almost $450.

Plus, the beauty of all these deductions is that because you are paying taxes on your full salary, pre-deduction, calculating deductions in your taxes when you file means that you are likely to get a lovely refund check--and we can all use those.

There are so many websites that can help you with this, some run by the government, some not. If you Google anything about tax deductions you will find a million websites listing the different types of deductions you can take and what you have to do to qualify. Here's one that I found randomly. There are many others.

The government's Energy Star website also tells you what tax deductions you can take for energy-efficient upgrades in your home or office. I found it just by googling "tax credit windows," but it has lots of other information as well.

The IRS website also has lots of information about deductions, including a piece on whether or not you should itemize, as well as a list of the types of deductions you can take.

One other thing I want to add, one other thing that would probably be very interesting to a lot of you, and something that I didn't know, something that missris said in a comment yesterday:

"First of all, the interest you pay off on student loans is tax deductible. So is about 80% of the cost of joining an alumni association. Second of all, if you have federal loans and are planning on working for a nonprofit (501c3, and this includes universities-like even if you're a professor or something) you should restructure your loans to reduce your payment and pay the absolute minimum amount so that you do not have everything paid off in ten years. This is key because after working ten years for a nonprofit, the remainder of your federal loans is FORGIVEN. Also badass? Those ten years don't even have to be consecutive."

So yes. There is much to be learned about student loans as well. And I'm sure Google could help you find out more information about that, too. And I also want to get into the credit card thing, as some of you requested, but this post is already long and complex, so I think I'll save that til tomorrow. I think all the tax talk is enough for today.