Medical student and resident end of year tax saving strategies

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Gettin toward the end of the year, you need to remember that the fiscal year ends with the year as well. What this means is that there are some things that you need to do to make sure you make the most of your taxes. There are strategies you can take to reduce the amount of federal tax you pay and also some things you can do looking forward.

1. take advantage of the student loan tax deduction. If you can, you should pay back 2,500 dollars which is the maximum you can deduct on your taxes. The best part about this tax deduction is that it is “above the line” meaning you do not need to itemize to take advantage of this. So why pay back your student loan interest before new years? You make an automatic 15-25% return on investment by doing this because you deduction 2,500 dollars multiply by your income tax rate (anywhere from 15-25%) for most of us. That is 375 to 625 dollars in your pocket. My question is (as I am not a tax expert) can you take advantage of the Lifetime learning tax credit on top of the student interest tax deduction?

Here is bankrate information on what “above the line” tax deduction is.

2. Lifetime learning tax credit if you can take advantage of both the interest deduction and tax credit, make sure you take advantage of the student tax credit if you just recently graduated. This is an additional 2000 dollars tax credit especially people who went to a private medical school. Here is the IRS publication explaining this in much greater detail. The way you apply for this is because the 2007 tax year, you were in school for the first half and paid that tuition and you earned income too.

3. Sign up for the roth IRA or traditional IRA. I think in most cases, you have until you file to sign up, up to the april 15th deadline. Contributing to your roth means you invest with after tax dollars. contributing to a traditional IRA, you pay with pretax dollars, thus you can deduct that on your taxes. Currently, because your tax rate is so low, it may make sense to sign up and contribute to the roth IRA.

4. If you are going to itemize, donate your junk to get that extra deduction. You usually get to deduct the value of the items that you donate.

5. Plan your stock sale accordingly. Remember that if you hold your stock for 1 year, you can sell your stock as long term capital gains. If you hold for less than that, you pay regular income tax on them. If you sell your stock at a loss, you can take a deduction of up to 3000 dollars, any excess losses, you can roll them over to next year. I think this applies to people that itemize however.

6. Property/ Housing: This is probably the thing that makes people itemize.  If you did buy a place, there are a lot of options tax wise.  If you just bought your place this year, consider waiting till January to pay your property taxes if you can, so you can deduct it next year when you have enough interest paid to pass the standard deduction.  If you just bought your place this summer before moving, also consider waiting to pay your january mortgage until the beginning of the month.  If you pay your january mortgage at the end of december, you deduct interest for 2007 and not 2008.

7. Plan your big purchases wisely.  Sales tax is tax deductible if your sales tax that you pay exceeds the state tax that you pay.  This is easily accomplished when you buy a car.

• If you just bought your house and you have enough deductions to break the standard deduction, consider buying that car in the year that you can itemize.  If you buy your car in the year that you take a standard deduction, you will most likely not be able to get any tax benefit from buying that car especially when you had to pay a few thousand in sales tax.

• If you are considering buying a “hybrid” car like a prius, you won’t get a tax credit because the energy policy act of 2005 phases out the tax break based on how many cars are sold and the government phases out benefits once 60 thousand cars of that type are sold.  Remember thus the prius does not have any tax credit available.

NOTE: make sure you double check with your tax man. The bottom line is that if you plan your taxes, you’ll save money in the long run.

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