When it comes time to file your tax return, do you hand over your W-2 and hope for the best? If so, you may be missing out on some valuable tax-saving opportunities. Some people spend a lifetime studying taxes, but even if studying the tax code isn’t your thing, you should have at least a working knowledge of taxes.
Here are a few you should consider:
Contribute to a retirement plan at work.
Saving for retirement is one of the best ways to save on your taxes while keeping money in your own pocket. If your employer offers a 401(k) or similar plan, you can contribute up to $18,000 per year, plus an additional $6,000 if you’re age 50 or older. The amount you contribute is a reduction of your taxable income.
Fund an IRA.
If you don’t have a retirement plan at work or just want to sock away more money for retirement, you can contribute up to $5,500 to an IRA ($6,500 if you’re 50 or older). If you didn’t contribute last year, you have until the filing due date, not including extensions, to make an IRA contribution.
Take advantage of an FSA at work.
Medical and Dependent Care Flexible Spending Accounts let you divert part of your salary to an account to reimburse you for medical and daycare expenses. You can put up to $2,550 into a medical FSA and $5,000 into a dependent care FSA for 2016. The contributions reduce not only your wages subject to income tax, but Social Security and Medicare taxes as well.
Save for college.
While 529 Plan contributions don’t offer an immediate tax break on your federal return, amounts you contribute grow tax-free. Distributions are tax- free as long as they’re used for qualified higher education expenses. Most states also offer a break on your state income taxes for contributions made to the state’s plan.
Go to school.
There are a variety of tax credits and deductions available for higher education expenses. The American Opportunity Credit and Lifetime Learning Credit are a dollar-for-dollar reduction on the tax owed on your return. The Tuition and Fees Deduction can reduce the amount of your income subject to tax by up to $4,000.
Buy a home.
Mortgage interest payments and real estate taxes are tax deductible. When you sell the home, you can exclude up to $250,000 ($500,000 for married couples) of gain as long as the home was your primary residence for two out of the last five years
Give to charity.
If you have enough deductions to itemize on Schedule A, charitable contributions made to qualified organizations can help further lower your tax bill. To deduct cash donations you must maintain documentation, such as a receipt or bank record of the donation. If you regularly make small cash donations and don’t keep records, consider bundling all those small donations into one large annual donation and save the receipt.
Track your mileage.
Whether you drive for business, medical purposes, or for charity, you can take a deduction for miles driven.
Become more energy efficient.
Energy-efficient home improvements, such as solar equipment, fuel cell property, small wind energy property, and geothermal heat pumps are eligible for a tax credit of 30% of qualified expenditures.
Move for a job.
This may not apply to everyone, but if it does fit into your plans for the next year, take advantage of the deductions .If you relocate more than 50 miles away for a new job, your moving expenses are deductible.
Pay points on a mortgage.
Points or loan origination fees are paid to lock in a lower interest rate on a mortgage. In the year you purchase the home, the points paid are fully deductible. If you refinance a home, points must be amortized over the term of the loan.
Don’t count on a someone else to know all of the deductions and credits for which you are eligible. It’s up to you to be a smart consumer and keep the necessary documentation to claim these tax breaks at year-end. A little thoughtful planning throughout the year can result in more money in your pocket at tax time.
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