Tax time is right around the corner, but there are some ways in which you may be able to reduce your tax bill. And no they are no slight of hand or trickery, but legitimate ways in which you can reduce that dreaded tax bill come April 18th. So first, why is Tax Day April 18th this year? Well, the 15th falls on a Saturday, and for some reason April 17th is a holiday in Washington, D.C. so this year we have until Tuesday the 18th to pay our taxes. I know you are thinking great, but how do I reduce my overall tax bill? First, we will look at some tax issues.
As 2016 was an election year, Congress did not do much to mess with the tax code or how we calculate our payments. But the new Administration and Congress has vowed to overhaul the tax code. Something that may prove more difficult than expected as it was the 1980’s that it was last overhauled in a real meaningful way. It may shock some that like healthcare, taxes can be an extremely complicated issue and one that polarizes the parties and factions within those parties. But 2017 may be a year that sees some significant changes if the politicians have their way. And that means that some deductions such as property tax, sales tax, and home mortgage interest may be on the chopping block in the years to come.
In order to cut down on some forms of tax fraud, the IRS requires tax e-filers to provide their 2015 Adjusted Gross Income and birthday to file their taxes. They will no longer provide electronic personal identification numbers at the time you file. You will need to have your pin from the previous year or the other two items of information previously mentioned.
First, you can lower your taxes by contributing to a Traditional IRA. These allow you to contribute up to $5,500 for those under age 50 and $6,500 for those over age 50. This allows for a dollar for dollar reduction of your income provided you qualify for the IRA. In 2016 if your employer did not have a 401(k) plan in place you have no income restrictions on your IRA contributions, but the limits still apply. For single filers, the IRA phase out is between $61,000 and $71,000, and for married couples, it is between $98,000 and $118,000. If one spouse has a workplace plan but the other does not the non-covered spouse can contribute the full amount provide the AGI is lower than $184,000.
If you are self-employed, you have another option at your disposal. For those people there is the SEP IRA which allows you to contribute up to 20% of your net self-employment income up to a maximum of $53,000. That means you can contribute these amounts based on your business income minus your half of the self-employment taxes. And in both instances, you have until April 18th to make the contribution for the previous year. I the case of the SEP IRA you have until October 17th provided you filed an extension.
If you have a health savings account or HSA, you can contribute to that in the same way you would an IRA. In order to have an HSA, you must have a high-deductible insurance plan meaning the deductible must be at least $1,300 for a single person and $2,600 for family coverage. For single filers, they may contribute up to $3,350 and families $6,750 per year. For those over age 55 they may contribute and extra $1,000 or $2,000 if both spouses were over age 55. And as with the IRA’s, this is a dollar for dollar reduction of your AGI.
A third way to lower your taxes is if you have qualified education expenses. The American Opportunity tax credit is worth up to $2,500 per eligible student for the first four years of college. This credit along with others do require documentation from the school that the student attends. For Lifetime Learning credits it is a 1098-T. But regardless of the credit, the IRS will receive the information from the school, so you will need their employer identification number to file for the credit.
Finally, the ACA is on the chopping block with the new Administration, but there are still some tax breaks for 2016 that might be had. If you had insurance for the entire year, there is not much to do here if it was through an employer. But if it was not then there are some steps to take to reduce the bill. Now there are numerous forms that go with filing for the ACA deductions, and I will not be going into them here, but if you want to know more about that, then you can Google ACA ad tax forms. But depending on where you get your insurance will determine what form you need. It will also determine if or how much you will get in credits or supplements.
There are ways to reduce your tax bill, but in most instances, you will be out some money first. But if it reduces your taxes then only you can decide if the expense if worth the deduction of taxes. But these are four legal ways in which you can reduce your tax bill and pay less this year.
If you have any questions or need additional information concerning taxes, contact me directly or leave a comment.
