It is only natural for people to always implement appropriate ways to minimize their expenses and increase their savings. So aside from the measures they do in keeping track of their daily expenses, they are also observing tax savings options each year.

There are some investments available so that people can get tax savings in their daily lives.

Because people always put their extra money or some percentage of their monthly income in the bank for future use, instead of keeping their money in ordinary savings account, they enrol this to the tax free savings account offered by banks, thus saving them some extra dollar which they could use for other important things.

There is also the Individual Retirement Accounts or the IRA, which is tax-deferred which allows individuals to contribute a part of their income into this program for their retirement use. The interest compounded each year for the duration of the account, is not being taxed, and could amount to a large amount of money which the individual then withdraws when he gets to the age of 59-1/2.

Even if only onse of the spouse is working, they could both enrol in the spousal IRA wherein the spouse with the income will be the one paying the contributions of the non-working spouse.

There are also tax-free government bonds that people could get into if they want to maximize their income. This usually is advised for people with higher income. Inquiry into banks for these opportunities would be beneficial if one is interested about investing into government bonds.

By keeping receipts of expenses, people could sometimes use this to get tax deductions at the end of the year. Donations to charitable donations could also lower the donors taxes for the year. However, being charitable should not be used for the sole purpose of tax reductions, it should be done for the right reason of caring for other people and that the tax reductions just come as a bonus of one’s goodwill.

For single people they are advised to enrol in private insurance health care insurance plans so their Medicare levy will not increase.

So during the filing for income tax returns each one should be thorough in doing this as errors in or neglect in adding exemptions like dependent children sometimes occur, and any other deductions were not carried out and that could mean an extra amount of money for them.

Tax savings measures are just some of the many ways people could save money each year. Many advocates of the environment are going green these days and they promote the use of solar energy to power homes and thus bring big amount of savings in the years to come by slashing energy expenses from their budget.

The conscientious use of water and electricity at home could also lessen monthly water bills. The decision to save is in everyone’s power and reach, and it is achievable as long as the determination in following the planned methods of savings is followed by everyone in the household.

Investors usually think about selling their losing stocks or mutual funds at the end of the year to realize losses that can offset capital gains realized earlier in the year. If you’re managing your portfolio tax efficiently and you harvest tremendous losses, you might not pay capital gains taxes for many years.

Generating a tax loss is like making lemonade out of your stock market lemons, but there are limitations. Here’s a big one: You can’t take a tax loss on an investment in a tax- sheltered retirement plan, including individual retirement accounts and 401(k) and 403(b) plans. It only makes sense to harvest losses in taxable accounts.

If your investing losses exceed your total gains, you can use any remaining losses — regardless of their short or long-term nature — to offset up to $3, 000 a year in ordinary income, including wages, dividends and interest. Any losses beyond that can be carried into future years to offset capital gains, then ordinary income.

What if you’d like to generate a tax loss but think the market may be close to a bottom and don’t want to be out of the market during the upswing? Here’s the beauty: You can sell one security and simultaneously buy another one that is similar without jeopardizing your tax loss. This essentially allows you to reap the rewards of loss harvesting without any impact on your investment performance. But, be aware that if you repurchase the same security or one that is “substantially identical” within 30 days, your tax loss will be disallowed under the wash sale rule.

This strategy is fairly easy with mutual funds, especially generic no-load funds that are part of a big family or in a fund supermarket. For example, you could sell shares in an S&P 500 index fund and buy shares in another family’s S&P 500 index fund without violating the wash sale rule. IRS Publication 564, Mutual Fund Distributions, Page 8, states: “Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.”

Another option is to sell shares in an S&P 500 index fund and buy shares in an exchange-traded fund such as the Standard & Poor’s Depositary Receipts (also know as Spiders) or the IShares S&P 500 Index Fund.

If you own shares in a mutual fund that charges a load, you might have to pay commissions when you sell shares in one fund and buy another. Some load-fund groups will waive commissions if you switch between funds in the same family. If they won’t, the sales fees might outweigh the benefits of loss harvesting.

You should never make a decision based solely on tax considerations. With loss harvesting, you have to have a pretty clear idea what you’re going to use those losses against, there are issues of fees, timing, and you have to be very careful you’re buying something similar to what you’re selling.

But, if you have losses, there may be no reason not to lock in those losses. If you’re using no-load funds it could cost you nothing to do the harvesting, and you lock in the loss indefinitely.

1. Mortgage Interest

If you’re filing jointly, you can deduct all your interest payments on a maximum of $1 million in mortgage debt secured by a first and second home. The maximums are halved for married taxpayers filing separately. You can’t use the $1 million deduction if you pay cash for your home and later use it as collateral for an equity loan.

2. Points

Your mortgage lender will charge you a variety of fees, one of which is called “points.” A point is calculated at 1% of the loan principal. One to three points are common on home loans, which can easily add up to thousands of dollars. You can fully deduct points associated with a home purchase mortgage. You cannot deduct a mortgage broker’s commission. Refinanced mortgage points are also deductible, provided they are amortized over the life of the loan. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.

3. Equity Loan Interest

You may be able to deduct some of the interest you pay on a home equity loan or line of credit. However, the IRS places a limit on the amount of debt you can treat as “home equity” for this deduction. Your total is limited to the smaller of:

• $100,000 (or $50,000 for each member of a married couple if they file separately), or
• the total of your home’s fair market value — that is, what you would get for your house on the open market — less certain other outstanding debts against it.

4. Home Improvement Loan Interest

If you take out a loan to make substantial home improvements, you can deduct the interest on this home improvement loan. There is no dollar limit on this deduction. However, the work must be a “capital improvement” rather than ordinary repairs. Qualifying capital improvements are those that increase your home’s value, prolong its life, or adapt it to new uses.

5. Property Taxes

Often referred to as “real estate taxes,” property taxes are fully deductible from your income. You can’t deduct escrow money held for property taxes until the money is actually used to pay your property taxes. A city or state property tax refund reduces your federal deduction by a like amount.

6. Home Office Deduction

If you use a portion of your home exclusively for business purposes, you may be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation.

7. Selling Costs and Capital Improvements

If you decide to sell your home, you’ll be able to reduce your taxable capital gain by the amount of your selling costs.

8. Capital Gains Exclusion

This is a true tax shelter for those who are treating home buying as an investment. Thanks to the Taxpayer Relief Act of 1997, many home sellers no longer suffer a taxable gain. Married taxpayers who file jointly now get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single folks and married taxpayers who file separately get to keep up to $250,000 apiece tax free — including single people who own a home jointly.

9. Moving Costs

If you move because you got a new job, you may be able to deduct some of your moving costs. To qualify for these deductions you must meet some fairly complicated requirements.

10. Mortgage Tax Credit

A home-buying program called mortgage credit certificate (MCC) allows low-income, first-time home buyers to benefit from a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home. You must first apply to your state or local government for an actual certificate.

Net capital gains and losses are fully part of adjusted gross income (AGI), with the exception that if your net capital loss exceeds $3,000, you can only take $3,000 of the loss in a tax year and must carry the remainder forward. Carried-over losses are used to reduce capital gains in a future year, and can be carried over until all used up. If you die with carried-over losses, they are lost.

Short-term gains are taxed as ordinary income. Therefore, the nominal tax rate will be whatever tax bracket you are in. More explicitly, it will be taxed at the federal tax rate (bracket) as determined by your taxable (not gross) income line on your federal tax return.

The tax treatment of long-term gains is somewhat more complicated, and depends on your income. Long-term gains are taxed at 5% if you are in the 10% or 15% federal tax brackets. Long-term gains are taxed at 15% if you are fall in one of the higher income-tax brackets (e.g., 25%, 28%, and so on). The long-term gains are included when figuring out your bracket.

But, contrary to popular opinion, not all of your long term capital gains are taxed at 15%. Here’s the breakdown of the long-term rates:

Investment Securities
The 5% Rate
Who’s Eligible: Individuals in the 10% and 15% federal income tax brackets with net long-term capital gains from selling investment securities held for more than one year.

More people than you might think qualify for the new 5% rate. Why? Because the 15% bracket covers 2005 taxable income of up to $29,700 for singles, $59,400 for joint filers, $39,800 for heads of households, and $29,700 for married individuals who file separately. Here’s how this rule works in real life. Say you’re a joint filer and have $55,000 of “regular” taxable income in 2005 and a net long-term gain of $10,000 from stock sales. The first $4,400 of gain ($59,400 – $55,000) will be taxed at only 5%. The remaining $5,600 ($10,000-$5,600) will get taxed at the 15% rate you hear so much about. Now let’s say your net long-term gain is $4,400 or less. In this case, you’ll pay only 5% on the entire gain.

The 15% Rate
Who’s Eligible: Individuals in the 25% federal income tax bracket or higher with net long-term capital gains from selling investment securities held for more than one year.

Real Estate (Owned as an Investment)
The 25% Rate
Who’s Eligible: Property owners and real estate investment trust (REIT) investors in the 25% income-tax bracket or higher who hold property for more than one year.

Investment real-estate gains are tricky since they can be taxed in two different ways. If you claim depreciation deductions, at least some of those gains (so-called unrecaptured Section 1250 gains) are taxed at a maximum rate of 25%.

For example, say you own a rental duplex and have deducted $32,000 of depreciation over the years. That depreciation reduces your basis in the property and results in a bigger taxable gain (or smaller loss) when you sell. Now you sell in 2005 for a $100,000 gain. The first $32,000 (the unrecaptured Section 1250 gain) is taxed at a maximum rate of 25%. The remaining $68,000 of gain is taxed at the “general rule” maximum rate of 15%.

If you own shares in a REIT, you can receive capital-gains distributions subject to the 25% maximum rate. This happens when the REIT sells a piece of depreciable property and distributes the profit to its shareholders.

To the extent an unrecaptured Section 1250 gain falls into the 10% or 15% bracket, it gets taxed at that rate.

Collectibles and Small-Business Stock
The 28% Rate
Who’s Eligible: Any collector in the 28% tax bracket or higher; some small-business stock shareholders.

Net long-term gains from collectibles (stamps, coins, baseball cards, and the like) are subject to a 28% maximum rate rather than the usual 15%. This is one reason stocks are a much better investment than Beanie Babies.

To the extent a long-term collectibles gain falls into the 10% or 15% bracket, it’s taxed at that rate.

The 28% maximum rate also applies to the taxable part of a gain from selling certain small-business stock that qualifies for a special 50% gain exclusion rule (under the tax code). Basically, these are shares in relatively small corporations that were originally issued to you and that you’ve owned more than five years. Consult your tax adviser if you think you have any shares fitting this description.

Homes and Small-Business Stock
The 0% Rate
Who’s Eligible: Homeowners who owned and used their home as a main residence for at least two years before selling; some shareholders of small-business stock.

Believe it or not there are a couple of ways you can lock in a gain without paying Uncle Sam a dime. The first is if you sell a home you’ve owned and used as your main residence for at least two years out of the five-year period ending on the sale date. You are allowed to exclude (pay zero federal tax on) up to $250,000 of gain. If you are married, you can potentially exclude up to $500,000.

Even if you don’t meet the two-out-of-five-years rule, you may still qualify for a reduced gain exclusion privilege. If your gain exceeds the amount you can exclude, the difference is treated as a long-term capital gain eligible for the 15% maximum rate (or 5% or 10% if your taxable income is low enough).

As mentioned, up to 50% of the gain from selling certain small-business stock can be excluded from your federal tax return. Again, consult a tax pro if you think you might qualify for this break. (Relatively few people do, but you could be one of the lucky ones.)

While you should never let the income tax “tail” wag the prudent investing “dog,” the long/short term distinction is something to keep in mind if you are considering selling at a gain and are getting close to one of the holding period boundaries, especially if you are close to qualifying for long-term treatment.

Research by Vanguard’s Investment Counseling & Research group shows that taxes on dividends and capital gains can be a significant drag on a fund’s overall performance—in many cases, the largest single drag. And that’s particularly true for stock funds.

Investing in funds that generate high taxable distributions isn’t necessarily bad—if you hold those funds in tax-advantaged accounts such as IRAs or 401(k) plans, where you’re not subject to annual taxes on capital gains and dividend distributions.
Key factors to consider when evaluating a fund’s tax-efficiency:

* Index versus active. Broad-based index funds are generally more tax-efficient than actively managed funds. Index funds buy and sell stocks in small increments throughout the year, which can limit capital gain distributions. Active funds tend to buy and sell stocks in larger lots, creating larger taxable events.

* Pre- and post-tax returns. When researching a fund, pay attention to the “returns after taxes” shown in the fund’s profile. This will give you an idea of how much of a bite the government has taken in the past. The goal is not to minimize taxes, but to maximize after-tax returns.

* Dividend yields. The federal government reduced taxes on qualified dividends in 2003, but dividends in taxable accounts are still subject to taxes. Take a close look at how the dividend yields in your taxable funds measure up.

If you’re seeking greater tax-efficiency, tax-managed funds bear serious consideration.

“Tax-managed funds leverage the advantages of indexing, but seek to improve upon after-tax performance through low costs and lower tax realizations,” said Francis M. Kinniry, Jr., of Vanguard’s Investment Counseling & Research group. “To do this, these funds generally require higher minimum initial investments, adopt early redemption fees to discourage short-term trading, and employ ‘loss harvesting‘ strategies that limit the amount of capital gains that are realized.”

When comparing pre- and post-tax returns, bear in mind that small differences between funds don’t necessarily imply greater tax-efficiency. Because returns are calculated after costs are deducted from dividends, a small gap might simply indicate higher fund expenses.

For example, if a hypothetical fund has a dividend of 1.50% and its expense ratio is also 1.50%, you won’t owe taxes on the dividend, because there will be no dividend after costs. If, on the other hand, the fund has a lower expense ratio, you would receive a dividend, though you might have to give up a portion of it to the tax collector. The question is whether you’d rather give part of your dividend to the government—while keeping most of it yourself—or lose all of it to the mutual fund company. High fund costs may minimize your taxes, in other words, but they won’t help you keep more of your returns.

And that, of course, is the goal – to maximize your return. Low costs and tax efficiency do not guarantee greater returns, and therefore should not be your main focus. Your return should be. But, I believe that over the long run, low costs and tax efficiency certainly increase your odds of higher returns and you should give them due consideration when selecting a fund.