As the new year kicks into gear, it’s time to get a jump start on maximizing your savings by taking advantage of ways to reduce your taxable income in months ahead.
By implementing the money-saving tips below where applicable, it’s possible to save tens of thousands of dollars off of your taxable income in 2016. Let the savings begin!
With charitable contributions, you can tag team your efforts by reducing your taxable income and making the world a better place. According to the IRS website, it’s possible to deduct giving amounts of up to 50 percent of one’s adjusted gross income when donating to a qualified organization.
Bonus: You can give either cash or property items and take the fair market value of the property item as a reduction of your taxable income.
Opening an account such as an HSA (health savings account) or an FSA (flexible spending account) can be a great way to reduce your taxable income, provided you have upcoming medical expenses that will accrue during the year.
A variety of medical expenses qualify for use with an HSA or FSA, such as impending surgeries, prescription medicines, doctor visit copays or dental expenses.
Both HSAs and FSAs can help you to reduce your taxable income. However, there are some differences between the two accounts you’ll want to consider:
– HSAs are only available to those who have a high-deductible health plan, whereas the FSAs have no eligibility requirements.
– HSA contributions are capped at $3,350 per individual and $6,750 per family annually, and FSA contributions are capped at $2,550 per year for both individuals and families.
– HSA contribution amounts can be changed at any time during the year, whereas FSA contribution amounts can only be adjusted during open enrollment periods or with a qualified change in family status or employment.
Whichever type of account you choose, there are significant savings to be had when choosing to reduce your taxable income this way.
According to the IRS, five types of interest payments can be deducted from your taxable income if you file using the long (1040-A) form:
– Interest paid on your home mortgage
– Interest paid on student loans
– Interest paid on your business loans
– Interest paid on money borrowed to purchase an investment property
– Interest on investment income (limited to your net investment income)
Talk with your certified public accountant about what types of interest payments you may have that can be used to reduce your taxable income.
For the 2016 tax year, the IRS has approved 401(k) and 403(b) contributions of up to a whopping $18,000 a year for those age 49 and under. Those 50 and over get the option to add an additional $6,000 to their retirement accounts, giving them the ability to reduce their taxable income by up to $24,000 with just 401(k) contributions alone.
By maxing out your 401(k) contributions, you not only work toward preparing a more secure future for yourself, you work to minimize your 2016 taxable income by as much as possible.
IRA contributions can be used on top of 401(k) and/or 403(b) contributions to further reduce your taxable income. For those under age 50, a traditional IRA can be used to reduce taxable income by up to $5,500. Those over age 50, they qualify for a traditional IRA contribution of up to $6,500.
Bonus: IRA contributions for the prior year can be made through April 15 of the current year, so there’s still time to reduce your 2015 taxable income by making a qualifying traditional IRA contribution.
Business Tax Deductions
Estimates show that as much as 30 percent of American jobs are held by the self-employed and those they hire. In order to minimize your taxable income as much as possible, it’s important to take full advantage of the tax deductions available to self-employed individuals if you own your own business, no matter how small.
If you’re self-employed, talk to a qualified CPA who specializes in preparing taxes for self-employed individuals to see if you can reduce your taxable income with deductions for things like your home office, Internet and phone expenses, travel expenses and health care premiums.
Learning how to take full advantage of the tax deductions available for your specific tax situation can be a smart way to reduce your taxable income and increase the amount of money you save and invest each and every year.