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You are here: Home / FINANCES & BUDGETING / Three Things We’re Doing to Save Thousands on Next Year’s Taxes

Three Things We’re Doing to Save Thousands on Next Year’s Taxes

March 21, 2016 by Mike 4 Comments

After seeing a tax advisor for the first time, we are making some changes for next year's taxes that will save us thousands of dollars! We also made changes to this year's return. Would these strategies will work for you?

By Mr. SixFiguresUnder

We’ve always done our taxes online.  Our income has generally been straightforward and our deductible expenses minimal.  We’ve never itemized deductions.  Like about two-thirds of Americans, we’ve used the standard deduction, which has thus far been larger than the total of our itemized deductions.

This year, for the first time ever, we went to get some tax advice.  It wasn’t for this April; we already prepared our 2015 tax returns.  Instead, we wanted to get some ideas about what we could do during 2016 to keep from paying more income tax than necessary.  We don’t mind paying taxes– it means we earned enough income to be taxed– but we’re not interested in paying more tax than the law requires.

It was perhaps one of the most profitable hours we’ve ever spent.  Not only do we have plans to save thousands of dollars in taxes in upcoming years, we also cut $360 from the amount we’ll owe on the 2015 tax return we’ll file in April!

These tax tips won’t help everyone– they wouldn’t  have worked for us two years ago.  Given our current income, expenses, and deductions, they work for us now.  Maybe by our sharing, they can help someone else.  It could even be you.

First, a little background.  Because income tax is based on taxable income for the year, three big factors determine the tax bill:

  1. How much income you had during the tax year
  2. What kind of income you had during the tax year
  3. What adjustments and deductions can offset your income

If you can change any of those factors, you can change the size of your tax bill.  Our tax advisor gave us just a few ideas on how each of those factors could be adjusted within the tax code to significantly reduce our annual tax bill.  If this is all old news to you, congratulations.  You’re way ahead of us  If this is new, and you think you can use it, I hope it helps.

Now, on to the tax savings!

 1 – Timing Charitable Gifts

I covered this extensively in this post, but in short, by bundling your charitable gifts from multiple years into one year, you can double your deductions in one year, earning a healthy tax savings, and then take the standard deduction the next year when your itemized deductions are lower than the standard.  This alone could save us several thousand dollars.

2 – Business Travel – Miles

If your work requires you to travel, or if you work two jobs and travel between them, in 2015 you can count 57.5 cents per mile as a business expense.  Tracking odometer readings at the beginning of each trip may be a little inconvenient, but the tax savings, especially with significant driving, can be enormous.

Note: Driving between home and your principal place of business is NOT a business expense.  It’s only once you’re already at work that the savings can kick in.

Looking back over the 2015 calendar, I found 46 days from September to December that I could prove a drive between my full-time job and my part-time law office.  At 43 miles per trip, that’s 1,978 miles, a business expense of $1,137.   Including the $1,137 expense on my Schedule C of business income reduces our tax bill by $319.  That’s real money, an extra $319 we can pay toward law school loans instead of sending to the IRS.

Stephanie doesn’t travel much for the blog, but did make one trip last year.  We revised her Schedule C to add the mileage for her drive to the airport.

This year, to make tracking mileage easier, I’m trying an app that uses my phone’s GPS to automatically track my miles.  After trying multiple apps for tracking miles, it was easy to choose.  MileIQ tracks every trip in a car.  All I have to do is tell it if a drive was personal,  business, or charitable.   MileIQ creates a report that makes it easy to add the miles to our tax return and support them in case of an audit.  You can get a free version of MileIQ that is good for 40 drives a month, but we opted for the paid version with its unlimited drives and other features.

Tracking mileage between offices,  on trips to the courthouse, to the county offices and to client sites will let us maximize our business travel deduction.  Just tracking my business mileage, we’ll be able to count almost $4,000 of additional business expense.  That’s $4,000 we don’t pay taxes on next April, a real tax savings of over $1,000.

Mileage for volunteer work at qualified charitable organizations can be deducted as well, but at a lower rate of 14 cents per mile.  While I’m tracking business miles, I’ll let my phone track these as well.  It will likely be about $300 of total deduction, for a real tax savings of about $75.

3 – Business Travel – Meals

Neither of us eats out much, and we have very few business meals.  Last year there was one, when  Stephanie’s business travel included a full day out of town.  To make calculating expenses easier, the IRS allows a business to count a certain amount per day (a “per diem” allowance) for meals and incidentals, no matter how much the actual receipts show.  The per diem can be different depending on what area of the country you’re in.  For this trip it was $65.  Even though Stephanie made sandwiches and brought them with her to the airport, she can count the full per diem as an expense.

When we added Stephanie’s mileage from a single trip to the airport and one day of meals per diem as deductible expenses on our tax return, we saw a real tax savings of $41!

It’s important to remember that we don’t have to DO anything different for these tax savings.  We already have to drive, and Stephanie had to eat on her trip.  All we have to do is track the expenses as they happen and include them on our tax return.  Given the age and value of our cars, and Stephanie’s frugal eating habits, our actual expenses are significantly lower than the standard rates the IRS allows.  That’s fine.  Because the IRS doesn’t want to have to look through our receipts, it sets an amount that’s reasonable and lets everyone use it.  If we can do the job for less, the difference is money in our pockets.

 

So, we’re glad we went to go see a tax advisor, and we’re glad we went to see him in time not only to plan for 2016, but also make a few changes to our 2015 return before filing.  Income tax is one of the largest annual expenses many people face.  Making a dent in our taxes will free up money for other great things, like finishing our student loan repayments and moving on to our next financial goals.

How About You?

  • Will any of these tax tips help you out this year or next?
  • What are your best tax savings tips?

 Note:  Just to be clear, the above is not tax advice.  Tax advice is applying tax law to a particular taxpayer’s individual circumstances.  I don’t know your circumstances and cannot advise about how the law might apply to them.  If you think any of these tips might work for you, do some research or find some professional advice.

Filed Under: FINANCES & BUDGETING

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Comments

  1. shelby says

    March 26, 2016 at 1:34 pm

    …I would love to email your articles to my daughter, and I find there isnt a button for that, just twitter , etc. Maybe an option , in the future ? Really enjoy the posts, and your ways of helping others….”) thank you !

    Reply
  2. Derek @ MoneyAhoy says

    March 23, 2016 at 7:23 am

    For me, I am going to harvest investment losses in 2016. This just entails selling some stocks that have lost money to get the $3,000 credit. I can always plan to buy back into them after a short period of time (still trying to understand how long I have to wait. I think that is called the wash rule.) This will help us to reduce our taxable income by $3,000 a year! Not too shabby, huh?

    Reply
    • Charlie says

      March 23, 2016 at 10:03 pm

      Derek – I think the time window is the date of loss plus or minus 30 days. So you’d need to wait 30 days after the loss from the sale. But one thing that I don’t understand is, if you purchase it back within the 30-day window, and eventually sell at a higher price, would you cost basis be when you re-purchase it, or when you originally purchased it?

      Reply
  3. Becca says

    March 23, 2016 at 1:10 am

    My husband’s a CPA (different country, so the tax rules are different). One thing I would urge you to do – because I’m pretty sure the IRS feels the same way our country’s tax office feels about this – is to make sure you actually keep a log of your business-related driving expenses. Many of his clients don’t, they just sort of estimate; and they have been caught out during audits. Over here if you’re audited you have to submit however-many weeks of log book entries to prove the mileage you’ve claimed. Many of his clients submit this, but it’s obviously falsified – there are other receipts that prove the car was in the shop that week so they couldn’t have driven the 700 miles they claimed, or the tax office spoke with the boss and discovered they were on annual leave that week, etc. If that happens the entire travel deduction is thrown out – not just for those 6 weeks but for the entire year. You really don’t want to be in a position where you falsify records -it’s illegal; and you’ll probably be caught out. It’s a pain, but keep a log as you go and that way you’ll be covered if you do get audited.

    Reply

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