An unexpected tax bill can ruin anybody’s day. To help avoid that unpleasant surprise, here are several easy moves many people can make to cut their tax bills. In many cases, you must itemize rather than take the standard deduction in order to use these strategies, but the extra effort may be worth it.
1. Tweak your W-4
The W-4 is a form you give to your employer, instructing it on how much tax to withhold from each paycheck. If you got a huge tax bill this year and don’t want another surprise next year, raise your withholding so you owe less next April. (And if you got a huge refund, do the opposite and reduce your withholding — otherwise, you’re just giving the government a free loan.)
2. Stash money in your 401(k)
Less taxable income means less tax, and 401(k)s are a popular way to reduce tax bills. The IRS doesn’t tax what you divert directly from your paycheck into a 401(k). In 2016, you can funnel up to $18,000 into an account (or $24,000 if you’re 50 or older). These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. And if your employer matches some or all of your contributions, you’ll get free money to boot.
3. Contribute to an IRA
There are two major types of Individual Retirement Accounts: Roth IRAs and traditional IRAs. You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work, and how much you make. (In 2016, you can’t deduct your contributions if you’re covered by a retirement plan at work, you’re married and filing jointly, and your modified adjusted gross income was $118,000 or more, for example.) There are limits to how much you can put in an IRA, too — in 2016, they are $5,500 per year, or $6,500 for people 50 or older. You have until the April tax deadline to fund your IRA for the previous tax year, which gives you extra time to take advantage of this strategy.
4. Save for college
Setting aside money for Junior’s tuition can save you a few bucks on your tax bill, too. A popular option is to make contributions to a 529 plan, which is a savings account operated by a state or educational institution. You can’t deduct your contributions on your federal income taxes, but you might be able to on your state return if you’re putting money in your state’s 529 plan (for example, you live in Colorado and invest through Colorado’s 529 program). Be aware, too, that there may be gift-tax consequences if your contributions plus any other gifts to a particular beneficiary exceed $14,000 during the year.
5. Fund your Flexible Spending Account
If your employer offers an FSA, take advantage of it to lower your tax bill. The IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year (the limit is $2,550 in 2016). Sure, you’ll have to use the money during the calendar year for medical and dental expenses, but you can also use it for related everyday items such as Band-Aids, pregnancy test kits, breast pumps and even acupuncture for yourself and your qualified dependents.
6. Subsidize your Dependent Care FSA
This FSA with a twist is another handy way to reduce your tax bill — if your employer offers it. The IRS will exclude up to $5,000 of your pay that you have your employer divert to a Dependent Care FSA account, which means you’ll avoid paying taxes on that money. That can be a huge win for parents of kids under 13, because before and after school care, day care, preschool and day camps are usually allowed uses. But it’s also great for caregivers, because elder care is often included, too. What’s covered can vary among employers, so check out your plan’s documents.
7. Rock your HSA
Health Savings Accounts are tax-exempt accounts you can use to pay medical expenses. If you have a high-deductible health care plan, you may be able to lighten your tax load by contributing to an HSA. Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too. For 2016, if you have self-only high-deductible health coverage, you can contribute up to $3,350. If you have family high-deductible coverage, you can contribute up to $6,750, all of which can be excluded from your taxable income.
8. See if you’re eligible for the Earned Income Credit
The rules can get complex, but if you earned less than $50,000, it might be worth looking into. Depending on your income, marital status and how many children you have, you might qualify for a tax credit of up to $6,269. And keep in mind, a tax credit is a dollar-for-dollar reduction in your actual tax bill — as opposed to a tax deduction, which simply reduces how much of your income gets taxed. It’s truly found money, because if a credit reduces your tax bill below zero, the money may be refunded to you.
9. Give it away
Charitable contributions are deductible, and they don’t even have to be in cash. If you’ve donated clothes, food, old sporting gear or household items, for example, those things can lower your tax bill if they went to a bona fide nonprofit organization and you got a receipt. Many tax software programs include modules that estimate the value of each item you donate, so make a list before you drop off that big bag of stuff at Goodwill — it can add up to big deductions. For example, a measly frying pan can get you a $10 deduction and a pair of women’s jeans $17, according to the TurboTax ItsDeductible program. An old basketball hoop nets almost $100. If you volunteer, there are a few options, too: You can deduct your out-of-pocket expenses for serving the organization, as well as mileage or gas used going to and from the location.
10. Keep a file of your medical expenses
If you’ve been in the hospital or had other costly medical or dental care, keep those receipts. In general, you can deduct qualified medical expenses that are more than 10% of your adjusted gross income for that tax year. So for example, if your adjusted gross income is $40,000, anything beyond $4,000 (10% of your AGI) could be deductible. If you rang up $10,000 of medical bills, $6,000 of it could be deductible in this example. If you or your spouse is 65 or older, the 10% threshold dips to 7.5%, giving you an even bigger deduction.
11. Sell those dogs weighing down your portfolio
Knowing you’re getting a tax deduction might make it a little easier to unload some of those bad stock picks that have been weighing down your portfolio. You can deduct losses on stock sales, which can offset any taxable capital gains you might have. The limit on that offset is $3,000, or $1,500 for married couples filing separately. One other note: Never let tax avoidance become a substitute for wise investing; only sell a stock if it truly doesn’t work for your portfolio anymore — don’t do it just to get a tax break. Because if you decide to buy back your stock within 30 days, the IRS can take back your deduction.
12. Get the timing right
From a tax perspective, there’s a huge difference between doing something on Dec. 31 and doing it a day later. If you know an upcoming expense is going to be tax-deductible, think about whether you can pay for it this year rather than next year. Making January’s mortgage payment in December, for example, will give you an extra month’s worth of mortgage interest to deduct this year. Similarly, if you know you’re near the threshold for the medical-expenses deduction, moving that root canal up a few months might make the pain more bearable if the cost suddenly becomes deductible, too.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: torem@nerdwallet.com.
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