Taxpayers still have time left to influence their tax future. Many taxpayers can do something to lower their tax liability with these tax tips.
1. TO SAVE MONEY, SAVE MONEY
One way to save money on taxes is to save money — in tax-advantaged retirement accounts. Saving leads to more saving.
Contributions to a 401(k) or IRA are pretax or tax-deductible, respectively, which reduces taxable income and potentially the tax bill. Taxpayers can contribute up to $18,000, or $24,000 if they are 50 or older, to their 401(k). They can save up to $5,500, or $6,500 if 50 or older, in a traditional IRA. Taxpayers who deduct their IRA contributions can designate contributions they make through April 15, 2016, on their 2015 tax returns, giving them a little more time to sock away that money and boost their tax benefit for 2015.
Maxing out a 401(k) and IRA at age 50 could lower taxable income by $30,500 — or, for a taxpayer with a 25 percent marginal tax rate, provide a tax benefit of more than $7,625. The IRA deduction is limited for higher-earning taxpayers participating in a 401(k) or other employer plan.
2. TO SAVE MONEY, GIVE MONEY
Another way to save money on taxes is to give money away. If taxpayers give to qualified organizations and itemize their deductions, their charitable contributions could lower their taxable income. Taxpayers need to keep receipts, pictures, or other documentation of any noncash donation. A $1,000 donation for someone in the 25 percent bracket who itemizes deductions can see $250 in savings.
3. TO SAVE MONEY, LOSE MONEY
The Dow Jones has decreased since this summer, so this could be a good time to help trim that tax bill. People with a large net capital gain in 2015 could have reduced their tax liability by selling stock before Dec. 31 if it would reduce the gain or generate a loss. Taxpayers should look at their whole financial picture with an investment advisor before offsetting their capital gains with losses in this way. They should not make these decisions for tax purposes alone.
4. TO SAVE MONEY, SPEND MONEY
It’s the triple play of tax savings. Putting money in a Health Savings Account (HSA) during the year saves taxpayers from paying taxes on that amount. Individuals can save $3,350, families $6,650, and taxpayers 55 or older can save an additional $1,000 in their HSA. But taxpayers can also use this money tax-free on qualified medical expenses. And funds left in the HSA grow tax-free.
Flexible Spending Accounts (FSAs) are also another great savings tool and work similarly to an HSA. But whatever funds taxpayers don’t spend before the end of the year — or grace period, if their company’s plan provides one — is just money left on the table. They can use this money for unreimbursed medical expenses such as eyeglasses, prescription medications, medical equipment, or copays.
5. TO SAVE MONEY, PAY ATTENTION
Many popular tax breaks expired at the end of 2014 and there has been uncertainty about their extensions. These include the deduction for state and local general sales tax, tuition and fees deduction, educator’s expense deduction, and tax-free qualified charitable distributions from IRAs. Changes are made when Congress acts on the expired breaks, which can come at the end of the year or early in January. Taxpayers need to stay tuned to learn whether they can use these tax breaks for 2015.
There are a lot of ways for taxpayers to save money on their taxes — from saving, giving, losing, and spending money to paying bills and getting health insurance. The trick is to save, give, lose, and spend money in the right way. Taxpayers can use online tax calculators to estimate their tax refunds and should always talk to a trusted tax professional when in doubt.