In addition to getting back in shape, or getting in better shape, saving money tends to top everyone's list of New Year's resolutions. But that doesn't mean you need to halt all spending—though deep down you know that daily trip to Starbucks is costing you a bundle. You just need to wise up a bit. Beyond the obvious indulgences, there are easier ways to keep some weight in your wallet. Hello, tax loopholes and insurance policy hacks. David Gagnon, C.P.A., C.F.S., R.F.C., C.C.A., owner and founder of First Financial Planners, an independent Financial and Tax Planning firm in Madison, CT, offered up some insider tips on how to make smarter investments and pocket more money in the new year. Get ready for some real, grown-up advice.
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If you're like most people, you think about taxes once a year (or possibly once a quarter) when it's time to file a tax return or make an estimated quarterly tax payment. However, if that’s your approach, you’re probably paying more than you have to. “Tax dollars that you might be able to avoid or postpone can be invested to increase your financial security and retirement income,” says Gagnon. Don’t throw away your money. Plan ahead for tax season, and you’ll thank yourself later.
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So, what exactly should you do with that money saved from your taxes? Invest. “There are many forms of tax incentive investments," says Gagnon. "Municipal bonds, Roth IRAs, and cash value life insurance policies (if properly structured) can provide tax-free income." It doesn’t stop there. “Annuities, IRAs, 401Ks, 403Bs, and pensions provide tax reduction through income tax deferral until withdrawals are taken in the future." Got that? Good.
Although the trend seems to be toward narrowing loopholes when it comes to your tax bills, there are still opportunities for most people to significantly reduce what they owe. The key is to focus on flexible techniques that can be modified when new tax laws are passed, or your circumstances change. For example, “pay or bunch up itemized deductions in a year your income is higher, transfer taxable investments to tax-deferred or tax-free options, or if you start a business, items not normally deductible may now be deductible," advises Gagnon. "Consult with a tax advisor to determine what is a legitimate deduction."
Have you been renting for years? Owning a home can be an excellent vehicle for reducing your tax bill. “In addition to a deduction for mortgage interest (limitations could apply), the interest on home equity debt of up to $100,000 on your home is deductible, without regard for how the funds are used,” explains Gagnon. If you aren’t a homeowner now, use 2015 to draw out a plan to save for one. In the end, you’ll be a richer man for it.
If you want a greater monthly cash flow, consider consolidating personal high-interest debt with a home equity line of credit. We’re talking credit cards, auto loans, personal loans, etc. Up to $100,000 of home equity can be borrowed, and used for any purpose, and the interest paid can be deducted as an itemized deduction. “Repayment terms and interest costs tend to be much more favorable on home equity lines of credit (HELOC) than other borrowing options available with other traditional lending sources,” says Gagnon.
Even if your total medical expenses do not exceed 7.5% of your adjusted gross income, you may be able to deduct a portion of your medical insurance premiums. This deduction is available to self-employed individuals who are not eligible for an employer’s subsidized plan, including one provided by a spouse’s employer. This provision has been extended several times. The deduction is now 100% after having gradually increased.
If you provide more than half of a parent’s support, you may be able to deduct the amounts you pay for medical expenses. “This deduction is available even if you cannot claim the parent as an exemption," says Gagnon. "If your parent is in a nursing home for medical, as opposed to “retirement” reasons, the costs, including meals and lodging, may also be deductible." It looks like being a good child really does pay off in the end.
Ah, your retirement account. Making regular payments toward it can reap some real benefits long before it’s time to retire. By making a contribution to an individual retirement account (IRA) you can save on your tax return for the year in which you make the contribution. The maximum annual IRA contribution was $5,500 in 2014, plus an additional $1,000 if over age 50, but check with a tax advisor because limitations could apply based upon income and other factors, notes Gagnon.
Starting to catch on to the importance of tax planning?
Get some cash back by giving back. Clean out your attic, basement or garage. Items you no longer need such as furniture, clothing, appliances, etc., can provide tax savings. “A deduction for the contribution of property to charity for its use or sale is allowed," says Gagnon. "However, deductions are limited based on the type of organization receiving the donation." Here is another opportunity you should consult with your tax advisor about.
Hotels have been seriously overbuilt in the past few years, so competition is fierce. Fixed prices for hotel rooms - charging the same rate to all customers and at all times - are things of the past. Major hotels are using computers to accomplish what is known as “yield management” to figure out when to charge less because demand is low and when to raise prices in response to expected high occupancy. For both airlines and hotels, this system is designed to maximize revenue.
However, you can benefit from this change in price strategy if you know how to play the game. It’s simply a matter of choosing to travel at a time when the fewest number of other people do. Prices differ not only by the season, but also by the day of the week. City hotel rooms almost always cost less on weekends, since business travelers are not helping to fill the house.
When choosing a hotel offering a lot of extras, think about which amenities are really important and which are window dressings. Free parking, free breakfasts, and no extra charge for children - these offers can mean significant savings, as opposed to a free bottle of champagne or a fruit basket in your room.
Know the difference between a mileage cap and unlimited mileage when you’re renting some wheels. “Sometimes the daily rate on a rental car with a mileage cap will be cheaper," says Gagnon. "If you are going to be driving fewer miles than the mileage allows (a typical cap is 150 miles per day), you may save from $3 to $7 per day on a rental car if you opt for a rental rate with a mileage cap. On the other hand, unlimited mileage rates offer freedom from watching the odometer. Whatever your choice, it’s best to calculate your costs ahead of time, so you can take the least expensive approach that meets your needs.” Also, if you’re traveling in a rental car for more than three days, a weekly rate may be less expensive than a daily one. Ask your travel agent to check both rates for the best deal.
Bonus tip: Be sure to ask what happens if you bring the car back early, especially with a weekend, 3-day, or 7-day “special” rate. A few agencies will try to keep your rate at the higher daily rental rate.
You can apply this to any kind of insurance policy—health, home, auto, etc. By agreeing to pay more out of pocket at the moment you need your insurance to pay a claim, you get a lower premium in return. Lower monthly payments can result in big savings (especially if you never have an accident or don’t need to use your insurance that often). Increasing deductibles can pay for higher limits of protection, since it is not the small claim that really hurts. "You should convey all of your circumstances to your agent and get quotes for various amounts and types of coverage,” says Gagnon. “Depending on your individual situation, this could save you approximately 10-15% over a year.”
Get this: Insurance companies will provide discounts when your homeowner's and auto policies are combined with the same carrier. Simply combining the two can save you big money over time. What’s more, "it’s also important to periodically shop around and check with other insurance companies to determine if you can reduce insurance costs when comparing current coverage," says Gagnon.
Do the research and find lower interest credit cards. The most important thing here is to keep open your old accounts with good credit history because it will help your credit score. The credit reporting agencies won’t see your timely payments on the old accounts if you close old accounts. Benefit from past good behavior, and save by switching to a better card now.
Impulse buying is a killer when it comes to draining your funds. Thankfully technology can be used to our advantage in this arena. Not only are there apps that can help you track your spending, but there are ones such as Retail Me Not that help you find the lowest prices for almost anything, wherever you are. For example, you’ll get a notification sent to your phone if a store nearby is offering discounts. Hey, every little bit helps.