Home ownership

Perhaps the most significant and most-used "loophole" of them all is home ownership.
As most home owners already know, the interest paid on mortgages and even second mortgages, home equity loans, etc. is often tax deductible if you itemize your return.
You can deduct the interest on up to $1 million of home mortgage debt, either for the purchase of a first or a second home. You can also deduct the interest on up to $100,000 of home equity debt. Just think of the implications of consolidating all that expensive credit card debt - which is not tax deductible - with a home equity loan that is deductible. Real estate taxes are deductible too.

Deferring income

This isn't for everyone. But if you are fortunate enough to be eligible for a year-end bonus, consider asking your employer to give it to you in January or later. Or, if you have consulting income, you could consider delaying billing so that you will get paid in the next tax year. This doesn't reduce the tax you will eventually pay, but it does save you money this year. It could also pay off if you defer enough income to reduce your current tax bracket. Just be certain you're not pushing yourself into a higher bracket next year.

Sweet charity

Did you know that big bag of gently-worn sweaters and pants that you dropped off at the local church or Salvation Army store could be a tax deduction?
Consider cleaning out your closets, garage, basement and any other place in your home where "stuff" you never use is accumulating.
As long as it is in good, useable shape, you can take it to an approved not-for-profit charity, donate it and take the deduction on your taxes. Remember to get a receipt though, as charitable deductions over $300 require documentation.
You'll be surprised what a few pieces of clothing, some books, old computer software and perhaps some rarely-used electronic items (or even that old car, truck or piece of equipment!) could add up to on your taxes. You'll probably save more on your taxes than you would make if you had a garage sale ... and you don't have to waste an entire weekend doing it either!
Work, travel time, gas and other expenses incurred while performing volunteer charity work also may be deductible under the right circumstances.
Most tax software packages will even help you appraise the value of your donations and other contributions you've made.
So get started giving. In most cases, you need to make those donations before December 31 of the current year for them to be taken as deductions on your return this year.

Offset your gains by selling stocks

Usually, the mantra for investing is "buy low, sell high." But there are times when it makes sense to sell a stock or security when it is down.
If you have substantial capital gains to report, consider selling some of the losers among your investments. You can erase your tax liability on the gain with a corresponding loss. Then you can apply a maximum of $3,000 in net capital losses against ordinary income, further reducing the amount of income on which you must pay taxes. Any additional losses over $3,000 can be rolled over to following years.
This also works with mutual funds, which may have generated capital gains when the portfolio manager sold some holdings (even if the value of the fund has fallen). Remember to make wise investment decisions though. You may not always want to sell a stock that is down just to use the loss on your taxes.
And don't assume you can divest yourself of stocks on December 31 and then buy them back on January 2. That violates federal tax laws set up to avoid stock flips for the purpose of creating tax losses. You have to wait at least 31 days to buy back the same stock or fund you sold.
A way around this dilemma may be realized by finding and purchasing a similar stock or fund in the same sector or industry. This is especially easy to do with mutual funds.

Max-out that 401(k)

Tax-deferred retirement accounts are some of the best investments out there. They allow the "common person" to invest substantial sums of money in the stock and bond markets and gains are allowed to grow free of taxation until you retire.
Employers also often match your contributions to company-sponsored 401(k) plans. That's an instant (and substantial) return on your investment!
Try to contribute the maximum amount of money allowed ($15,500 in 2007) if you can afford it in your budget. Often, these retirement contributions won't impact your take-home pay as much as you'd expect. Consult a tax adviser or run the numbers yourself to see how much you can afford to put aside and the overall impact it will have on your take home pay (remember to figure in the tax savings when you do these calculations!).
Also consider contributing to an IRA for yourself and your spouse. Your $4,000 contribution ($5000 if you're over 50 - and the numbers go up to $5000 and $6000, respectively, in 2008) is fully deductible if you did not participate in a company-sponsored retirement plan.
Even if you did participate in your company's retirement plan, your spouse usually can contribute $4,000 to an IRA as long as your combined adjusted gross income is $150,000 or below and your spouse isn’t a participant in a company-sponsored plan.
Self-employed people should set up Keogh plans by December 31. Once the plan is in place, you can contribute up to $44,000 (in 2007) until the tax filing deadline.

Flexible spending accounts

These programs deduct money from your paycheck on a pre-tax basis to pay for health care expenses not covered by insurance and for childcare or elder care. You typically can contribute a maximum of $3,000 annually to a health care FSA and $6,000 annually to a dependent care FSA. The exclusion of account contributions from taxable income in effect produces tax savings of 40% or more.

- Want more ideas? Read our tax blog. -