Budgeting Basics Part IV - Incorporating tax benefits into your budget and using your budget
This is the last in a four-part series. Last week's Budgeting Basics Earful included a discussion on entering goals into your budget and incorporating different sources of money into your budget. This week we discuss certain types of every-day expenses that might produce tax benefits that can have the effect of lowering the expenses in your budget. In addition, we'll talk about how you can actually use your budget.
Here is a handful of expense categories that might appear in your budget and that have tax benefits associated with them:
- Child care costs. Part of the amount you pay a caregiver or an after-school program to care for a a child who is age 13 or younger, or a disabled dependent or spouse, can qualify for a Child and Dependent Care Credit. The care must be provided at a time when you (and your spouse, if you are married) are working or attending school.
- Day camp. If you pay to send a child under age 13 to day camp so that you can work or go to school, this expense may also qualify toward the Child and Dependent Care Credit.
- Education costs. Costs of education that are not part of the minimum requirements for your job and that don't qualify you for a new trade or business, can be deducted as a miscellaneous itemized deduction. Included in the deductible amount are tuition, books, lab fees, and transportation to and from the place of education. Miscellaneous itemized deductions are only deductible to the extent that you itemize your deductions and that the amounts exceed 2% of your adjusted gross income.
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- Job-hunting costs. Costs you incur to search for a job are deductible as a miscellaneous itemized deduction, subject to the 2% limitation mentioned in the point above. Such costs include resumes, placement counselor fees, stationery, postage, travel to and from interviews, advertising, as well as research material about job searching or about a particular type of business to which you are applying for work.
- Job costs for which you received no reimbursements. If you spend money on your job and don't get paid back by your employer, you can deduct the amounts you spent as a miscellaneous itemized deduction, subject to the 2% limitation mentioned above. Such costs might include, among other things, mileage in your car (other than commuting to and from work), postage, office supplies, long-distance telephone expense, and computer expenses. Be sure to keep the actual receipts to document your job costs. For mileage, keep a diary or calendar showing how many miles you drove, when, where, and for what purpose.
- Medical costs. You are allowed an itemized deduction for medical expenses you incurred during the year for yourself, your spouse, and your dependents, to the extent that such expenses exceed 7.5% of your adjusted gross income. Deductible medical expenses are medical expenses for which you were not reimbursed by insurance, and include doctor and dentist fees, hospital costs, medical insurance, and prescription drugs.
Using your budget
Once you complete your budget, don’t just file the papers away in a drawer! You need to use your budget and keep it in your mind whenever you engage in financial transactions. If a major change occurs, such as a job change, a move, or a baby, get out your budget and make revisions.
Keep track of your spending during the month and don’t let yourself overspend. For example, if you designate $200 for dining out during the month, keep a running tab to remind yourself of how much you’ve already spent. If you reach $200 before the end of the month, stop eating out!
Each month, compare your budget to your actual financial activity in order to account for any differences that have occurred. You may find that your first budget does not compare closely with your actual income and expenses. The more you experiment the better you’ll become at determining the exact numbers for your budget.
At the end of the year look back over your budget and determine how you did. Did you earn as much as you anticipated? Did you spend all the money you expected to spend? Did you save the amount you intended to? If you come out ahead and discover that you didn’t spend as much as you expected to or you earned more than you expected to, don’t just take the extra money and spend it frivolously. The first thing to do is look over your budget and discover what caused the difference. Make sure all of your bills have been paid.
If you truly have extra money, consider alternatives for dealing with the money wisely. Found cash can give you a boost toward meeting your lifetime goals. You can determine where best to apply the extra money and give yourself a head start toward future planning. Always have a fallback plan for investing extra money, or keep the extra money in your emergency fund to hold for the future in case the next budget detour doesn’t go in your favor.
At least once a year, meet with your family and discuss your progress toward meeting your goals. Did you meet all the goals you set for the previous year? Did you have money left over that you applied to future goals? Keeping your family in the loop and allowing everyone to contribute to the family budget decisions prevents untold arguments and disagreements. When all members of the family are aware of how much it costs to operate the household and how much money is available for various expenses it avoids misunderstandings enables them to recognize why certain things have to be accomplished on a particular timetable.
By Gail Perry, CPA - AccountingWEB Managing Editor