Tax season is a particularly ugly time of the year for me. I typically suffer a tiny little seizure every time I realize how much money I'm doling out to Uncle Sam. Don't mistake me for a rich man, as we're decidedly middle class. Our tax problems are entirely born out of our lifestyle.
Both my wife and I work full-time at decent-paying jobs, and up until now we've had neither kids nor a mortgage. Ergo, we don't enjoy any of the major tax breaks that the majority of our peers do. When it comes time to complete our taxes, we rely on credits and adjustments that are a bit less common than simply having a dependent or deducting interest expense.
I'm not a tax professional, but here is one way we've learned to pay less:
The lifetime learner credit
One tax credit that has been particularly useful in our case is the lifetime learner credit. I'm one of those perpetual student types who is always taking classes to broaden my overall skill set. The lifetime learner credit is appealing because it's so flexible in its application. Essentially, it offers a $2,000 credit for classes taken to further one's career. It can be used for an unlimited number of years, you don't have to be enrolled in a formal degree program, and it works for any kind of coursework that you could reasonably connect to your line of work.
Most importantly, it covers not just tuition and fees, but "course related books, supplies, and equipment." That aspect of the credit made it far more rewarding to me. Because I was pursuing some highly technical classes, the supplies and equipment that were essential for completing the coursework were at least as expensive as the tuition itself. Being able to receive a credit that covered not just the tuition but all the ancillary expense as well made a world of difference.
As always, it's absolutely imperative to save all the appropriate receipts and records, and to be able to make a strong case that those "related" expenses were a necessity of taking the class.
Tax consequences of retirement savings
Aside from the lifetime learner credit, I always make sure to devote some attention to the tax consequences of our retirement contributions.
In this case, my wife and I are in yet another unusual situation. I am part of a defined benefit plan, while her employer offers no retirement plan at all. I'm one of those fiscal pessimists who shudders to imagine the state of defined benefit plans when I'm ready to retire a few decades from now. Instead, I tend to factor that plan out of our retirement picture and instead we focus on IRAs, both traditional and Roth.
Traditional v. Roth is a tired old debate that really boils down to one simple tax question: Do you think you'll be taxed more or less when you're at the age of retirement? If you think your tax burden will be greater later on, go for the Roth. Otherwise, opt for the Traditional IRA. Personally, I think tax rates could be much higher in the future, so the Roth is the more attractive option. But this year, because our tax burden was high and we're trying to focus on saving, we opted to move my wife's IRA contributions in to a traditional vehicle and take the tax deduction now.
True, it's a bit messy when each spouse has both a traditional and a Roth IRA, and you have four separate non-employer retirement accounts to keep track of. But the approach works well for our unique situation, and it provides us with what some like to call "tax diversification."
Some day, when we own a house in the suburbs and rear our 2.1 dependents (oops, I mean children), our tax picture will undoubtedly look rosier than it does today. Until that time, focusing on retirement account contributions and some less common tax credits like the lifetime learner will allow us to temper that check we write to Uncle Sam every April.
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