There are still ways to minimize your tax bill before Tax Day.
It’s officially tax time – a time to look back over the previous year with an eye toward maximizing deductions and tax credits and lowering your tax burden.
Tax experts shared their top 10 simple and proven methods of reducing tax bills this year:
1. Check if you qualify for the earned income tax credit.
The earned income tax credit, which applies to low- and moderate-income taxpayers, can offer credit as high as $6,000. Anyone earning less than $50,000 to investigate whether this credit applies to them. Are you a new parent, boom you are qualified. Many people qualify but don’t realize it so they lose out on the benefit. Check it out here.
2. Start a small business.
Becoming an entrepreneur can also improve your tax situation because business owners are able to take more control over how they pay taxes. They have the option of keeping more money in their company instead of drawing it down as income, and they can also count certain costs as expenses. (Tax professionals can help small business owners navigate the ins and outs of the Internal Revenue Service rules on eligible expenses, which are lengthy.)
3. Take advantage of your children.
The tax code offers a handful of benefits to parents, including credit for child care costs, the child tax credit (worth up to $1,000 for each child under age 17 and phased out for high earners) and the ability to count more dependents in your household. Alimony payments are also tax deductible.
4. Put money into savings.
Just a small fraction of parents create 529 college savings accounts for their children, which means they miss out on the tax benefit of letting the money grow tax-free. As long as the money goes toward tuition, parents don’t have to pay taxes on the earnings. (They invest after-tax money.)
Voluntarily lowering your take-home paycheck by upping your retirement contributions might be painful in the short-term, but it offers two benefits. First, you beef up your retirement savings, and second, you lower your tax burden. Money funneled into certain types of retirement accounts, including 401(k)s and IRAs, is tax deductible, within limits.
5. Factor in New AMT Exemption Amounts
You may be required to pay alternative minimum tax (AMT) if your taxable income is more than a certain amount. The AMT is in addition to your regular income tax, and it eliminates many of the deductions and tax credits for which you are eligible. For 2015, the exemption amounts have been increased to the following:
- Single: $52,800
- Married filing jointly or surviving spouse: $82,100
- Head of household: $52,800
- Married filing separately: $41,050
- Check with your tax professional to determine whether certain transactions, such as Roth IRA conversions, will affect whether you are subject to AMT. This will help you to determine whether it’s best to defer certain transactions.
6. Donate to charity.
Charitable contributions aren’t the only type of tax-deductible gift. Individuals can also receive up to $13,000 without paying taxes, and parents can join forces to give each child $26,000 with a technique dubbed “gift splitting.”
Used but in a great condition materials can be ‘gifted’ to a near by Goodwill organization.
7. Track medical expenses.
Certain health-related expenses, including acupuncture, supplies like bandages, and breast pumps are tax deductible. For a complete list of eligible items, visit irs.gov, and be sure to keep all receipts.
8. Become more energy efficient.
The federal government encourages taxpayers to make their homes more energy efficient by offering credits for a variety of moves, including installing insulation, new windows or doors, and qualified heating and cooling systems. Certain alternative energy sources, like solar panels, are also eligible for tax credits.
9. Check for ordinary losses on stock losers.
Tax expert and U.S. News contributor Barbara Weltman says that while last year saw a lot of stocks go up, not every investment paid off. She points out that ordinary losses on the sale of stock can be deducted as capital losses, which can offset capital gains (including capital gain distributions from mutual funds) and up to $3,000 of ordinary income, or $1,500 for married couples filing separately.
There are several deductible items that many people are unaware of that you can watch out for. For example:
- You can deduct certain expenses incurred for a job search in your present occupation, even if you do not get a new job. However, you cannot deduct the expenses if they were incurred while looking for a job in a new occupation, if you are looking for a job for the first time, or if there was a substantial break between the end of your last job and your subsequent job search.
- You can deduct the depreciation of your home computer if you use it to produce income.
- You can deduct the depreciation of a computer or cellular telephone if you use it for work and it is required by your employer.
Some tax benefits are not as obvious as others and special rules may apply in order for you to receive these deductions; therefore, it is important that you allow your tax professional to help you make the right determination. (Find out what deductions you could be missing out on in 10 Most Overlooked Tax Deductions.)
The Bottom Line.
Preparation is the key to having a tax season that is free of frustration and mistakes. It also helps to make sure that you receive all of the tax benefits for which you are eligible. Being prepared also helps to eliminate the risk of having to file an amended return, or of receiving a notice of amendment from the IRS. Usually, a notice of amendment means your refund is being reduced, or the amount of taxes you owe is being increased. Avoid the surprises by working with a competent tax professional.
These tips should make it easier for you to maximize your deductions and avoid overpaying Uncle Sam.
