During tax season, most people get a refund after filing their taxes. Many of us then start to consider how we can save money on taxes next year and what we will do with our tax refund (if we haven’t completed planned it out already). Many people offer advice on things you should do throughout the year to save money on taxes the following year. Some suggestions I think are rather crazy! Do not do these.
1) Buy a house.
Uhm what? Sure property taxes and the interest you pay on your mortgage are tax deductions that you can claim. However, you now have a house! You now have a mortgage to pay that equals hundreds of thousands of dollars. If you’re already planning to buy a home or in the process to purchase a home then great be aware and take advantage of the deductions come tax time. However, do not purchase a home because you will get a tax break. You’re going to pay much more to the lender than the break you would receive on your taxes. You will not save money on taxes this way.
2) Have a baby.
This is another suggestion that seems absolutely crazy to me. Sure you can claim an exemption worth $3,900 per child, so you do get a tax break for the dependents in your household. However, that doesn’t put much of a dent in the costs of raising a child. According to the USDA the average cost of raising a child to 18 years of age in America is $241,080. So that child exemption will save you a little over $70,000 in 18 years. Yeah, that doesn’t come close. Of course if you already have children or were already planning to have children being aware and taking advantage of the exemption is great. Every bit counts, but if someone lists that among the reasons to have a child do not take any more financial advice from this person. I was completely shocked and thought the person was joking, but she wasn’t. You will not save money on taxes this way.
What should you do? Well some great options that are good all around:
1) Contribute more money to your 401(k).
The contributions to this account are pre-tax so you end up having a lower taxable income. You’ll also have more money invested for retirement. A win-win.
2) Donate more money.
The money you contribute to your favorite charities and churches is tax deductible. Make sure to get an acknowledgement or receipt of your donation. You’ll be doing good for others and yourself.
Photo Credit: Tax Credits