I can’t stand tax season. I know taxes are necessary to keep the country running but the last few years I’ve owed over $2,000 every April, which got me looking for ways to knock this down to $0. While taking a look around I’ve come to the conclusion that I can either take a job that pays much less money or I could find a way to legally reduce my taxable income. I chose the latter for obvious reasons…
So How Do I Reduce My Taxable Income?
You have to itemize your deductions rather than take the standard deductions in order to take advantage of these write-offs:
- Retirement Savings: Contributions made to a 401k are tax deferred contributions which means that your taxable income will be reduced by the amount you contribute (the limit is $18,000 for 2016). You can also deduct up to $5,500 in contributions to a traditional IRA ($6,500 if you’re 50 or over. And, if you’re self-employed, you can deduct up to $52,000 (or 25% of compensation) in SEP IRA contributions for 2014.
- Flexible Spending Account: A FSA allows an employee to set aside a portion of earnings to pay for qualified expenses as established in the employers cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Money deducted from an employee’s pay into a FSA is not subject to payroll taxes, resulting in substantial payroll tax savings.
- Paying for dependent care: According to IRS.gov. The dollar limit on the amount of the expenses you can use to figure the credit is $3,000 for the care of one qualifying individual or $6,000 for two or more qualifying individuals. The amount of your credit is between 20 and 35 percent of your allowable expenses. The percentage you use depends on the amount of your adjusted gross income.
- If you’ve made certain energy-efficient home improvements: Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property. Credits are worth up to 30% of the cost, with no cap. This will expire in 2016.
- Paying for college: The American Opportunity Credit takes up to $2,500 off your tax bill per year for four years if you’ve paid eligible costs towards a post-secondary degree program.
- Student loans: You can deduct up to $2,500 in interest, though benefits begin to phase out for joint filers with modified adjusted gross income over $120,000 ($60,000 for singles).
- Save for your kid’s college education: You can save up to $2,000 tax-free every year through an ESA (Education Savings Account). This can reduce your taxable income by up to $2,000.
- Health savings account as part of a high-deductible health insurance plan: Families with qualified plans can deduct up to $6,500 ($3,300 for singles) in contributions made to HSAs. The money can be rolled over to other years and used for a range of qualified expenses.
- Expenses related to moving or a job search: If you moved more than 50 miles for a job within a year of starting a new job, you can deduct expenses related to the move, including mileage, lodging, moving services and supplies.
- Mortgage Interest: You can deduct interest on your primary residence and a second home that is used primarily for personal use.
- Points on a mortgage: If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you cannot deduct all the interest on your mortgage and you cannot deduct all your points.
- If you paid taxes: Odd as it seems, you can deduct certain taxes, including property tax on your primary residence, vehicles (depending on the state), and state and local income taxes.
- If you gave money to charity: You can deduct your charitable contributions every year but make sure you save the documentation proving that you donated to a charity and how much you donated. For those of you that tithe to a church, it also counts.
What are some ways you use to lower your tax bill?
*These are just some ideas to help you reduce your taxable income and get the most out of your deductibles. I’d like to point out that I’m NOT a tax professional or tax attorney so please consult with one if you have any questions related to taxes.
**If you like talking about Money, Paying Off Debt, Building Your Net Worth and Retiring Early…This is the place for you! Subscribe to receive emails of new blog posts, news, tips, and exclusive content!!!