It’s officially tax time – a time to look back over the previous year with an eye toward maximizing deductions and tax credits and lowering your tax burden. Popular deductions include mortgage interest, real estate taxes and student loan interest (up to $2,500). And that’s just the beginning. Other options include tax credit for child care costs, retirement contributions to 401(k)s and individual retirement accounts and even qualified education costs.
Tax experts shared their top 11 methods of reducing tax bills this year:
1. Check if you qualify for the earned income tax credit.
The earned income tax credit, which applies to low- and moderate-income taxpayers, can offer credit as high as $6,000. Karl Frank, author of the book, “Go Tax Free,” urges anyone earning less than $50,000 to investigate whether this credit applies to them; he qualified when he became a new parent, and he points out that many people qualify but don’t realize it they so lose out on the benefit.
2. Launch a business.
Becoming an entrepreneur can also improve your tax situation because business owners are able to take more control over how they pay taxes. They have the option of keeping more money in their company instead of drawing it down as income, and they can also count certain costs as expenses. (Tax professionals can help small business owners navigate the ins and outs of the Internal Revenue Service rules on eligible expenses, which are lengthy.)
3. Take advantage of your children.
The tax code offers a handful of benefits to parents, including credit for child care costs, the child tax credit (worth up to $1,000 for each child under age 17 and phased out for high earners) and the ability to count more dependents in your household. Alimony payments are also tax deductible.
[Read: 10 Tax Mistakes Parents Often Make.]
4. Put money into college savings.
Just a small fraction of parents create 529 college savings accounts for their children, which means they miss out on the tax benefit of letting the money grow tax-free. As long as the money goes toward tuition, parents don’t have to pay taxes on the earnings. (They invest after-tax money.)
5. Keep your mortgage for as long as possible.
Mortgage interest payments are tax deductible, which means homeowners benefit, from a tax perspective, by keeping their mortgage for as long as possible (as opposed to paying it off early). Of course, you have to balance that tax benefit against the additional interest payments incurred, and the satisfaction of paying off the debt if you have the savings to afford to do so.
6. Save more money for retirement.
Voluntarily lowering your take-home paycheck by upping your retirement contributions might be painful in the short-term, but it offers two benefits. First, you beef up your retirement savings, and second, you lower your tax burden. Money funneled into certain types of retirement accounts, including 401(k)s and IRAs, is tax deductible, within limits.
7. Give more money away.
Charitable contributions aren’t the only type of tax-deductible gift. Individuals can also receive up to $13,000 without paying taxes, and parents can join forces to give each child $26,000 with a technique dubbed “gift splitting.”
8. Track medical expenses.
Certain health-related expenses, including acupuncture, supplies like bandages, and breast pumps are tax deductible. For a complete list of eligible items, visit irs.gov, and be sure to keep all receipts.
9. Become more energy efficient.
The federal government encourages taxpayers to make their homes more energy efficient by offering credits for a variety of moves, including installing insulation, new windows or doors, and qualified heating and cooling systems. Certain alternative energy sources, like solar panels, are also eligible for tax credits.
10. Check for ordinary losses on stock losers.
Tax expert and U.S. News contributor Barbara Weltman says that while last year saw a lot of stocks go up, not every investment paid off. She points out that ordinary losses on the sale of stock can be deducted as capital losses, which can offset capital gains (including capital gain distributions from mutual funds) and up to $3,000 of ordinary income, or $1,500 for married couples filing separately.
11. See if you have any worthless securities.
Weltman says if you have a security that has become worthless – and it must be completely worthless, not just have filed for bankruptcy, for example – then you can deduct your loss. You treat the security as if you sold it on the last day of the year when it became worthless, she adds, and you have seven years to do so. That means you can check back for any securities that became worthless in 2006 or later.
These tips should make it easier for you to maximize your deductions and
avoid overpaying Uncle Sam.