Ask an Expert: Best Tax Strategies for Renters

Real Estate, Taxes
on September 10, 2014
Tax Tips for Renters

Dear Kirk: What are some tax deductions/tax reduction strategies for renters?

Kirk Says: Fundamentally, the landscape in some parts of the country has evolved in such a way that it is more cost advantageous to rent than to buy in that particular market. And often, personal circumstances may dictate renting as the most suitable option—a job that requires you to relocate regularly, for example.

Before we look at tax strategies, let’s look at cost reduction strategies. First, find a roommate, or roommates, if space allows. This immediately cutting the cost or rent and utilities in half, saving you money and typically allowing you to enjoy a larger space than you might have been able to afford on your own. In addition to extra space, many roommates cook meals together and carpool whenever possible, driving day-to-day expenses down.

Once you’ve taken advantage of all possible ways to save money on living expenses, then you can focus on tax strategies.

First, save for retirement. When possible, always contribute to a company-sponsored 401K plan—and be sure to max out your contribution if you employer promises to match it. This allows you to save a chunk of your annual salary, while reducing your adjusted gross income. For example, if you contribute 6 percent before taxes, your adjusted gross income is 6 percent less every year.

Beyond 401k contributions, you should consider maximizing a Roth IRA by contributing the maximum allowed of $5,500 per year. This technically does not reduce your tax bill for the year, but it will offer big benefits in the future when you may want to utilize some of the money to get out of the renting game and purchase your first home—or, obviously, for retirement. Because you’ve already paid tax on that money, you will have no tax due in retirement, provided you’ve followed the IRS rules associated with Roth IRA’s. This could be of further benefit in the future since there is a high probability that you may be in a higher tax bracket later in life than you find yourself in today.

Assuming that you’re still flush with cash, with all debts paid off,  you may choose to pay premiums into a cash value life insurance policy. Not only does this allow you to pick up some death benefit here and lock in his insurability at an early age, but these policies also act very similarly to Roth IRA’s in their tax treatment of the growth associated with the cash value.

Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at

Found in: Real Estate, Taxes
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