Although none of us like paying taxes, we have no choice. The federal tax courts and the Supreme Court of the United States have held thus far that our tax system is both constitutional and legal. Since we have adopted a form of government in which the courts, not the individual, decide legality, we are legally bound to pay taxes; it is not voluntary.
The apostle Paul, in Romans 13, 1 Timothy 6, and Titus 3, exhorts us to be obedient to and respectful of the authority God has placed above us. There is no requirement that the authority is correct or righteous but only that we obey as long as it does not contradict God's Word. Jesus also made no distinction between what was legal and what was unfair; He simply said to give to the government what is due it and give to God what is due Him. So, as long as we are not compelled to do something outside of God's Word, we have to obey that law.
However, we are under no obligation to pay more taxes than we actually owe. The following are suggestions on how to save on tax liabilities.
Refinancing tax savings
If you buy a home and have to finance the mortgage, points paid are not deductible in the year you pay them. They must be amortized over the life of the mortgage. But if you refinance for a second or third time, any points paid on a previous refinancing and not yet written off are fully deductible for the year in which the new refinancing is completed.
Lowering property taxes
If you received a property tax bill that you feel is too high, you have the right to appeal your property assessment.
- Find out where to file an appeal and when the deadline is. The deadline is usually statutory and can't be extended.
- Call or visit the assessor's office. Find out exactly how your tax assessment was determined.
- Look for mathematical errors in the calculation of your tax.
- Look for factual errors in the description of property that overestimates its value. This could include a one-car garage listed as a two-car, basement erroneously listed as finished, incorrect lot size, and so on.
- Compare your assessment with neighbors. See if their tax went up too or just yours. If yours was the only house on which tax was raised, find out why.
- Compare the assigned market value with recent sales prices in the neighborhood.
- Determine whether you have any tax breaks for which you qualify. This could include senior citizen, disabled, veteran, low income, widow, and so on.
Valuable tax-cutting tools
Of the dozens of tax-cutting tools legally available, the following are the ones that seem to be the least utilized but can benefit taxpayers the most.
- Roth IRAs. Fund Roth IRAs at the beginning of the year for your children who will earn wages at any time during the year. Funding the Roth at the start of each year instead of later will make a big difference over the long run due to the power of tax-free compounding.
- Give appreciated stock. Give appreciated stock to children over 13 who need money to pay college costs. Don't sell the stock and give children the cash. If the children sell the stock, they will pay tax on the appreciation at his or her own tax rate rather than your capital gains tax rate.
- Defer investment income. Defer investment income for children under age 14 to avoid the "kiddie tax." The "kiddie tax" imposes the parents' tax rate on an investment income of a child under age 14.
- Set up education IRAs for children under age 18. Each child can receive up to $500 annually that has been deposited in an education IRA. The funds will be tax free when spent on qualifying education.
- Claim the child care credit offered by the IRS when possible. This can reduce your tax bill if you pay for child care that frees you to be employed. This includes summer camp fees, money paid to relatives and friends for babysitting, or any other fees associated with someone caring for your child so you can work.
- Make interest-free loans to adult children or other relatives. This cuts the family tax bill when the money is taken from a taxable account and is used on expenditures that create deductions.
- Support retired family members with gifts of dividend-paying stock or fund shares. This is better than making cash support payments, because much of the dividend income will be tax free because of the recipient's personal exemption--extra standard deduction for persons over age 65 and standard deduction.
- Specifically identify shares of securities that you buy and sell. That way, you can select for sale those in which you have the highest or the lowest tax basis.
- Invest in mutual funds that are tax efficient. Funds generally make taxable distributions at year end of taxable gains they realize. With low-turnover funds, such as index funds, the tax charge is generally much smaller than with actively traded funds.
- Deduct bad debts and worthless securities. The statute of limitations is six years on these, so you can file amended tax returns that far back to claim these losses.
- Sideline business or hobby. Establish your sideline business with a business I.D. number, license, certificate, and/or tax number. Although it may be nothing more than a part-time hobby, it can create numerous potential tax breaks.
Although we are mandated by God's Word to honor our governmental authorities and pay our taxes, we are not obligated to pay more than what we legally owe. But many of these tax-saving tools are not commonly known. By doing some investigation and some "homework," you can find numerous ways in which to save on taxes.
Copyright Crown Financial Ministries. Used by permission. All rights reserved. For more information about this and other financial resources, please visit www.crown.org.