How to Lower your Tax Liability Without Itemizing your Return

In preparing a tax return, you can choose to either itemize your deductions or claim the Standard Deduction. If you decide to itemize, you can use dozens of tax deductions such as the mortgage interest deduction and charitable contributions to reduce your adjusted gross income. However, if you do not qualify for many deductions then you should take advantage of the Standard Deduction, but do not stop there. There are plenty of tactics you can use to lower your tax liability without itemizing.

The Standard Deduction

If you do not itemize your return then you can take what is called “the Standard Deduction,” which is a dollar amount that non-itemizing taxpayers can subtract from their adjusted gross income. There is a set amount for individuals, married couples and taxpayers who claim the head of household filing status—this amount changes every tax year. There are also additional amounts available to persons who are blind and/or are 65 years or older. The standard deduction amounts for the three main filing statuses are listed below.

Single:

2009:$5,700; 2008: $5,450

Married Filing Separately:

2009: $5,700; 2008: $5,450

Married Filing Jointly:

2009: $11,400; 2008: $10,900

Head of household:

2009: $8,350; 2008: $8,000

Property Taxes

There are a handful of tax deductions that can be used to further reduce your adjusted gross income. These “above the line” deductions can be claimed even if you are taking the Standard Deduction. The first of which is the property tax deduction. If you own a house, and have to pay property taxes then you can either deduct the amount of real estate taxes paid during the year or a flat rate ($500 for single taxpayers and $1,000 for married couples filing a joint return). Usually if you owned a home then you would want to itemize since you could claim the home mortgage deduction, however if your deductions are still lower than the Standard Deduction you can still use your property taxes to lower your tax liability.

New Car Sales Tax

If you purchased a new car in 2009 then you can deduct all state and local excise taxes paid on the vehicle, up to $49,500. To qualify, the purchase must have taken placed between February 16^th and December 31^st in the year 2009. To claim the full credit your adjusted gross income also needs to be under $125,000 for single taxpayers and $250,000 for married couples filing a joint return.

Alimony Payments

If you have to make alimony payments as part of a divorce settlement then you can take advantage of the alimony payment deduction even if you do not itemize. The IRS considers alimony payments taxable income to the recipient in the year received, and allows the taxpayer making the payment to deduct the amount paid from their adjusted gross income. Unfortunately non-cash settlements such as property or voluntary payments do not qualify. For more information, including a list of IRS requirements check out this article on the alimony payment deduction at the RDTC Tax Help Blog.

Qualifying Relocation Expenses

If you had to move for a new job opportunity then a portion of the related expenses can be deducted from your income in addition to claiming the Standard Deduction. To qualify your new work location must be at least 50 miles further from your former home than your old job was. Additionally, you must work a full time schedule for at least 39 weeks during the first year after starting the new job.

According to the IRS the following moving related expenses can be deducted:

• Packing and transportation costs for moving household goods
• The cost of shipping goods from a place other than your former home (such as a storage unit)
• Any storage bills, or fees for disconnecting or reconnecting utilities
• All move-related travel expenses (such as mileage, tolls, lodging, parking fees, etc.)
• Expenses of shipping or relocating your car and pets to your new home.

On the other hand, the following expenses cannot be deducted:

• License plates and registration for your car
• Any part of the purchase of a new home, or expenses of leasing a new apartment
• Real estate taxes, or lost security deposits

Lower 401(k) Contribution Limits Likely in 2010

Earlier today I came across this new article from Boston.com discussing the likelihood that 401(k) contribution limits might get lowered next year. As the author explains, the main reason for the reduction in contribution limits is because of the U.S. dollar’s poor inflation rate in 2009.

Unless inflation really kicks up in the last few months of 2009, it appears that the amount that working individuals can contribute to their 401(k) will actually go down in 2010. In 2009, individuals under age 50 could contribute as much as $16,500 to their 401(k). Individuals age 50 and older were able to contribute $22,000. In 2010, it looks like individuals under age 50 will only be able to contribute $16,000 to their 401(k). Those age 50 and older will still be able to contribute an additional $5,500 to their 401(k) but the total amount they can contribute will now be $21,500. In addition, the amount one can contribute to a defined contribution plan will also fall -- to $48,000 in 2010.

All of this is happening because inflation is flat. When inflation is not increasing, a lot of things are impacted. Social Security is a big one. After a record increase in benefits last year, there will be no increase in benefits in 2010. Most people are still not aware of this but they really need to be planning accordingly. On the "plus" side, the Social Security wage base is expected to remain unchanged next year. Earnings in excess of $106,800 will not be subject to the 6.20% Social Security tax.

The best course of action? Contribute the maximum amount permitted this year!