Just finishing your tax return for 2015 and it’s not looking too good? Well there isn’t much you can do to fix last year’s return now but here are 5 ideas you can start looking into to make sure 2016 is a better year between you and the IRS.
Number 1 Increase retirement plan contributions at work. If your employer offers either a 401(k), TSP, 403(b) or 457 plan you have the opportunity to lower your taxable income while saving for retirement. As you can tell that list of options was rather long but ask your tax advisor and human resources at work to make sure it allows tax deductible contributions. If so and you are under age 50 you can do up to $18,000 a year or if you are over age 50 you can contribute up to $24,000. Not everyone is able to save this much if they have other obligations so just save what you can. But have your tax advisor tell you how much you save on your taxes by increasing your deferrals by say $50 a pay or maybe $100 a pay. Your retired self will thank you one day.
Next option is an IRA contribution. This works just like that plan through work but you set up an account at any IRA custodian like an investment provider or a bank. There are income limits here if you participate in the plan at work and they can get a little complicated but if your financial advisor or tax advisor does the calculation and you can make a deductible contribution than that is another $5,500 for those under 50 and $6,500 for over age 50.
Number 3 is a big one it’s called Health savings accounts. More and more people now have what’s called a high deductible health insurance plan, meaning you are out of pocket much of the cost of your care before the insurance kicks in up to a certain dollar level. For single plans in 2016 the minimum, but still high, amount is $1,300 and for families it’s $2,600. This comes with an advantage though which is you can deposit money in an account on a pre-tax basis, and then use it tax free for medical expenses. This isn’t the old Flexible Spending Accounts you keep this money until you need it. If you are single you can put away $3,350 and for a family it’s $6,750. And then if the policyholder is over 50 it’s another $1,000 on top of both of those figures. This is important money for medical expenses for anyone on the plan even if it’s years in the future, and it’s tax deductible now.
Number 4. Short on money but have a lot of stuff? Donate it. There are lots of organizations that can use things like clothes, appliances and working stuff like bikes and so on if you have them. Keep a good inventory of everything you donate, make sure it’s to an organization that allows for it to be deemed a donation, and always keep in touch with your tax advisor. Maybe even take a picture of anything you intend on donating for your records.
Number 5 and the last one in this video is called the Lifetime learning credit. Now a days people don’t go straight through college on a full time basis like they used to. And they also go for more specialized certificates and training programs through creditable universities. With that in mind as a result of the American Opportunity Tax Credit or AOTC there is the possibility to get a tax credit for some of the cost of these programs. It can be up to $2,500 of a credit which is different than a deduction. A credit is a dollar for dollar reduction in the tax due. There are income phaseouts for this of $80k single filer and $160k married and a variety of other requirements to qualify. But look into this and see if you can get some of the government’s money to fund your education costs.