Consider contributing $500 to an education IRA for each child under age 18. “Up until now, they haven’t really caught on,” says Barajas of these IRAs. “People feel the $500 is a limitation, and some are not sure their kids are going to college.” A big if, as money withdrawn from an education IRA for noneducational purposes is slapped with a 10% penalty. “However,” he says, “there’s a motion pending in Congress to raise the contribution limit to $2,000.” Plus, the earnings in an education IRA grow tax-free. “If you place $500 a year into an education IRA as soon as your child is born and invest the money wisely, the balance in the IRA can be substantial by the time your child is of college age,” notes Broussard.
Another tax-wise way to save for your children’s college education, suggests Genevia Gee Fulbright, is to consider a Qualified State Tuition Program, also known as a Section 529 plan. Before Section 529, the tax status of these programs was unclear. “Most of them required state residence, and some plans only permitted use of contributions for in-state college tuition,” she explains. The new provision allows states that have such plans to open them up to nonresidents, and today, 43 states and the District of Columbia offer programs. Earnings in plan accounts grow federal- and state-income-tax-deferred, and the contributor remains the owner of the account. For more information, see www.saving forcollege.com, which also has links to state plans.
Sell your home and keep the profits. “Beginning this year, up to $500,000 in profits from the sale of your home is excluded from taxes,” says Barajas. This figure applies to married couples filing jointly; for singles, it’s $250,000. Also, he says, if the total sale price is under $500,00
0, you don’t even have to report it. “You used to have to report it on Form 2119. Now, you can just report it on Schedule D, but only if it sold for over $500,000.”
Calculate your tax liability both jointly and separately. “In certain situations,” says Broussard, “filing separately may save money for a married couple.” If you or your spouse is in a lower tax bracket or if one of you has large itemized deductions, she explains, filing separately might lower your total taxes. Filing separately may also lower the phase-out of itemized deductions and personal exemptions, which are based on adjusted gross income.
When choosing your filing status, you should also factor in the state tax implications. You don’t want to shoot yourself in the foot by reducing your federal tax liability if it means increasing your state tax liability by more than you saved on your federal return.
FOR the SELF-EMPLOYED AND BUSINESS OWNERS
Going into business for yourself can yield a bounty of tax advantages, especially if you’re currently employed in a profession whose skill set is readily transferable to another line of work. This strategy is one of Ed Fulbright’s favorites, and he refers to it as “converting from a W-2 to a consultant.”