As the new year begins, it’s time once again to prepare for tax season. Here are six strategies that may help you lower your tax bill.
If you’ve been filing taxes for several years now, you know the routine. Gather W-2s, 1099s, and other income documents for the revenue agents.
And if you’ve been working for a few years, chances are you have a few opportunities now to cut the tax bill. Lisa Greene-Lewis, a certified public accountant and the TurboTax blog editor, said people should look at the difference between taking the standard deduction and itemizing.
“If you do just standard deduction, you’re not able to maximize as much. Seventy-five percent of people take the standard deduction. But they could really maximize it if they itemize. That opens up the ability to write off charitable contributions, unreimbursed employee expenses, and even what they paid to get taxes done, including tax software,” she said.
Here are some quick ways to save yourself some money for this tax year.
1. Max out retirement savings. There are many reasons to do this. Not only will your future self thank you, but it may cut your tax bill by sheltering pre-tax earnings in a 401(k), 403(b), or traditional IRA. For 401(k)s and 403(b)s, you can squirrel away up to $18,000—and if you’re over 50, you can set aside another $6,000, she said. The current limit on IRAs is $5,500. Whether you decide on a traditional IRA where savings are allowed to grow on a tax-deferred basis until withdrawn, or a Roth IRA, in which funds are taxed up front but then allowed to grow tax-free, depends on what you think your tax bracket will be when you’re ready to begin withdrawals as a retiree.
People who are self-employed can also save for retirement by contributing 25% of their income, up to $53,000, and taking a deduction, Greene-Lewis said.
2. Health savings accounts. People who are self-employed or have a high-deductible health insurance plan of at least $1,250 for an individual can establish an HSA, said TPI Group, a Virginia-based tax advisory. One hundred percent of HSA contributions are deductible from gross income, up to the limit, which in 2016 was $3,350 for an individual and $6,750 for a family, according to the IRS.
3. Mortgage deductions. This is probably one of the biggest deductions for many people. Interest on the mortgage loan and property taxes are both deductible, making this a significant write-off for many people, Greene-Lewis said.
4. Tax credits for kids. Uncle Sam blesses births and adoptions by taking off $3,950 for added dependents, and another $1,000 for kids via a child credit, according to the Internal Revenue Service’s Credits & Deductions page. Parents who adopt children can deduct many expenses via a tax credit, with the maximum credit at $13,190, so keep records carefully.
5. Smart college savings. Look to a state-sponsored 529 college savings plan to send Junior to school. Earnings are totally tax-free and you keep control over the funds, Kiplinger said. Plus, if a child forgoes school, parents can switch the account to another child or take it back.
6. Charitable deductions. If you cleaned out your closet and donated the contents to your favorite charity, or if you made cash donations, that’s another deduction, Greene-Lewis said. For cash gifts under $250, a canceled check or credit card statement is fine. For goods, make sure they’re in good condition and be sure to get a receipt.
Taxes, according to Oliver Wendell Holmes, are what we pay for civilization. But that doesn’t mean you should pay more than you owe.