How can spending money save you money?

June 10th, 2009

No one likes having to pay bills, but some things that cost you money have a silver lining. When tax season rolls around, some of your expenses from the past year can actually help lower your taxes.

Everyone who makes money has to pay income taxes, which are generally higher the more money you make. But when the government figures out how much to charge you in income taxes, they use a measure called the adjusted gross income, which is an attempt to better represent the portion of the money you make that you actually get to use. For example, you may make $1,000 a month at your job, but that doesn’t mean you can actually put $1,000 in the bank at the end of every month: you’re spending at least some of that money on various things that the government views as tax deductible (or the amount you “adjust” your income by).

Tax deductible items are things like donations to certified charities, work expenses, and certain educational expenses. On the other hand, if you spend money on, say, an iPod or a pair of jeans, that’s money you could technically save, and you’re spending it for your own enjoyment, so it doesn’t lower your adjusted gross income. While tax deductible expenses usually don’t come from things you’d enjoy spending your money on, there is a consolation prize: those items you’re paying for now mean more money that’s yours to keep later on.

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