Taxes
The interest gained from state and local bonds is usually exempt from federal income taxes. These investments generally pay back at a lower interest rate than commercial bonds of similar quality.
Since Treasury Bonds are similarly exempt from state and local income tax, they can be a particularly good investment for those who are in high tax brackets and live in high-income-tax states.
You have the ability to invest some of the money that you would have paid in taxes to add to your retirement fund. Many employers will offer the opportunity to defer a portion of your earnings and contribute them directly to your retirement account. Some of them may even match a portion of your savings. If this is the case, it is always advisable to save at least the amount that your employer will match. This will give you an automatic 100% gain on your money.
If you are self-employed, look into getting a Keogh, SIMPLE or a SEP IRA.
Record Keeping for Taxes
It is advantageous to categorize your expenses:
- Income
- Exemptions
- Medical Expenses
- Taxes
- Business Expenses
- Education
- Travel
- Auto
If you are audited, it is very likely that the auditor will ask to see the last few tax returns. It is recommended to keep these tax returns forever.
An added benefit of keeping your tax returns is that you can see what you claimed last year, allowing you to adjust for the current year.
If you purchased goods that you plan to sell later, you should keep the receipts to calculate your gain or loss on it correctly.
- Anything regarding the property you own and any fixes and repairs that you perform
- Receipts for any jewelry or other valuable collector's items
- Records for capital assets, stocks, bonds and such
If you are an employee of a company, your system needn't be complex - you can keep your records separated in folders.
If you are a business owner, you may want to consider hiring a bookkeeper or accountant. Check the Financial Guide for Business on this website.
Education Expenses
You must make a choice between two types of tax education credit.
- The American Opportunity Tax Credit will work for the first 4 years of college for at least full-time study.
- The Lifetime Learning Credit applies for as long as the student studies, but the percentage of savings per year decreases drastically.
An education IRA is different than a standard IRA in these ways:
- Withdrawals aren't taxed if used for qualified education expenses.
- Contributions can be made only up until the point that the client reaches 18, and all funds must be distributed by the time that they are 30.
- Contributions are not tax deductible.
It is possible to have various 530 accounts for the same student, each opened by different family members or friends. There is no limit to the number of people that can open an account like this for a child.
The account can be transferred to another family member at any time. If the original child decides against going to college or is granted a scholarship, another family member can still utilize the money that has been saved.
- The Section 529 allows for much larger yearly investments, whereas the Section 530 currently only allows for $2000 annually.
- The choice of investments in the Section 529 is extremely conservative and limited while the Section 530 allows for many different options.
- The Section 530 is a nationwide program while the 529 varies from state to state.
- The Section 530 will let you use its funds for primary and secondary education, while the Section 529 can only be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary (k-12) public, private or religious school of the beneficiaries choosing.
In certain instances, yes, although deductions need to adhere to a few guidelines. The deduction is also subject to income phaseouts.
- The deduction ceiling is $2,500.
- If you are a dependent, you may not claim the interest deduction.
- You need to be the person liable for the debt and the loan must be purely for education.
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