Best way to reduce taxes given my situation?

Question

Hello

I'm trying to figure out what I can do, to best reduce my taxes.

Here's my situation:

- I'm in the process of buying a home. From what I know, I can write off the taxes paid on the property and also interest paid on mortgage.
- My wife is pregnant.
- My wife has her own business where she works part-time. She'll probably bring in an income of $15-20k for 2007. Anyway I can claim her as an dependent? How about the baby in the womb? :)

Tax info:
State: NJ
My Income: 80k-85k
Wife's Income: 15-20k

I'm pretty ignorant as to what to do, to best reduce my taxes. If anyone can shed some light, I'd appreciate it.

Answer 1

sounds like you got the right idea assuming the baby is born before the end of the year you can claim the child for the year. child tax credits etc.. based upon income and additional 1k deduction because of it. taxes and interest on the house are great assuming theres enough to use it over the standard deduction. You can contribute to an IRA (traditional) or 401k this will also decrease your taxes. You can also write off many expenses due to your wives own business and yes you can claim her (married filing joint).

There are plenty more things you can do beyond just the above depending on your situation.

Answer 2

You can never claim a spouse as a dependent, but you do get an exemption for each of you if you file a joint return. If you each file as married filing separately, then you each take your own exemption on your own return. So either way you get two exemptions for the two of you. It's almost always better financially to file a joint return.

If the baby is born in 2007, even on 12/31 at one minute until midnight, then you can take an exemption for the child, plus child tax credit, for the year. If he/she doesn't arrive until 2008, then no you can't.

Depending on when you close on the home, your itemized deductions for the year might exceed the standard deduction. There are a number of other items you can deduct in addition to mortgage interest and real estate taxes. Download schedule A and the instructions to get an idea of what these are. You would have state and maybe local taxes, and possibly charitable contributions - plus some other items that you might have. Note that if you file separately, you either both have to itemize or both take the standard deduction.

If your wife is making that much from her business, you (or she) should probably be filing quarterly returns, or risk paying penalties at tax time for underwithholding.

Answer 3

Your easiest tax reduction strategy is to put as much money into tax-shelltered and tax-deferred retirement accounts as possible. At least, you want to stay out of the 28% tax bracket, which starts at a taxable income of about $77,000 for married taxpayers filing a joint return, which is what you should do.

Hopefully you have a 401k at your place of employment. For 2007 you can contribute up to $15,500 (I assume you are under the age of 50). If you did this one thing, you would avoid the 28% tax bracket.

Given the amount of your wife's self-employment income, a regular, traditional IRA would be the best choice for her. She could contribute $4,000 even if her net income from self-employment drops below that amount, since you have earned income to cover that contribution under the "spousal IRA" rules. If her income drops to little or nothing in the future, you can still contribute to her spousal IRA. If her income is stable and you want to set up a SEP IRA, that will have the advantage of reducing her self-employment income and saving on Social Security and Medicare taxes.

I would be hesitant to start deducting for the home office for your wife's business, since it is an audit flag and any depreciation you take will be recovered as ordinary income when you sell the house. The depreciation recovery will be at a high tax rate, defeating the purpose of reducing your taxes.

Your mortgage interest and real estate taxes are a tax deduction if you itemize. To the extent your total itemized deductions are greater than the standard deduction of $10,700 you will receive a reduction in taxes owed.

Check into establishing a 529 college savings plan when your child is born. Any earnings inside that plan are tax free if the money is spent for qualified higher education expenses. While the 529 plan contributions do not give you a tax deduction, over time there can be significant tax savings to you and the child. Some states have a state income tax deduction for 529 plan contributions, so check into that.

For young people with the energy to do it, changing houses every few years can be a huge tax windfall. If you live in your house two years, and then sell it, you can exclude an amazing $500,000 of capital gain and never pay taxes on it. I would plan on doing this a few times to accumulate wealth tax free.

Answer 4

You can only claim the baby after it is born. If s/he is born on or before Dec. 31, you can claim her this year. You can reduce your tax liability by having your wife contribute to a SEP IRA. She can contribute up to 20% of her net self employment income. Also, if you are not already contributing, you should contribute to a 401(k) through your employer. Also, if your employer offers, your should contribute to your Flexible Savings Account - read the details carefully on this.

Answer 5

I am retired 85000 dollars income taking standard deduction for me and wife due to no dedctions. how can i reduce my taxes

Answer 6

How about a home office (based on square footage % of home) that is exclusively used for your spouses business. Also use of car, ect.