The dreaded tax season always has people worried how much they are going to owe in taxes. No one likes having to fork out a huge chunk of change, especially if you are living paycheck to paycheck. However, there are few ways that you can limit the amount of taxes you pay. Here are some of the options that are currently available.
Individual Retirement Accounts and Workplace Retirement Plans
If you contribute to an IRA or a 401(k), you can reduce your adjusted gross income (AGI)—higher AGI means you will owe more to the government. The maximum contributions in 2016 allowed by individuals for an IRA was $5,500, while the limit on a 401(k) plan was $18,000. If you are 50 or older, the IRA maximum limit gets bumped by $1,000 with an additional $6,600 for a 401(k). However, keep in mind that you will have to pay a tax at some point on the money when you withdraw it. It is better to do this later though since your income will probably be lower than it is now, and therefore, the taxes you will pay should be lower.
The Benefits of Buying a House
If you are a new home owner or plan to buy a home, you should know that mortgage interest is tax deductible. For the first few years after you make a purchase, majority of your payment will be interest, which means you can deduct a large portion. You can also deduct the amount of money you pay each year in property taxes.
Donating to Charity
Any charity donations you do throughout the year can be tax deductible. Just make sure when you do donate something that you get a receipt. If you donate property rather than cash to charity, you can deduct the fair market value of the property. If you aren’t sure how to determine this, you can review the IRS website on this subject here and use their publication entitled Determining the Value of Donated Property.
Keeping Track of Any Medical Expenses
If you itemize your deductions, many medical expenses can be tax deductible. You are allowed to deduct any qualified medical expenses that exceed 10% of your adjusted gross income. Just like with charitable donations, you are going to want have detailed records of the transaction which will include the medical providers information, and an invoice of all of the things that you received.
Earned-Income Tax Credit
The Earned-Income Tax Credit (EITC) was created to benefit people with low to moderate incomes. If you qualify for EITC, you still have to file a tax return, even if you do not owe any taxes. What the EITC does is it reduces the amount of tax that you owe and may end up giving you a refund. To figure out of you qualify for EITC, visit the IRS website here.
Saving for College
Last but not least you can look into a 529 plan or a college savings plan. These aren’t tax deductible, but the money won’t be taxed as long as you use this money for education, such as tuition, books, and other related expenses. With these kind of plans, this can help parents save for their kid’s educational future coupled with the extra tax advantage.
Hiring A Professional
No one knows more about what kind of deductions you can take to save you money than a professional tax preparer. They can take a look at your particular situation and help you come out on top. Though you may not want to fork out the money for someone and opt to do them yourself, the peace of mind and the added benefit of not missing a possible deduction can make it worth it.