Before you sit down to attack your taxes, grab last year’s return as a reference and then review your W-2s, 1099s, charitable contribution receipts. Additionally, your credit card and bank statements may be useful to jog your memory for unreimbursed business or medical expenses.
Although the tax code is complicated and thorny, here are six potential ways to reduce your bill.
1) Claim Your Credits: Tax credits provide a dollar-for-dollar reduction of your income tax liability, which is why they are the best way to put a dent in your total bill. Just remember that you must claim the correct filing status to qualify for many of these lucrative credits.
- Earned Income Tax Credit: A refundable credit for married couples with 2016 earned income under $53,505 and singles who made less than $47,955. The more children you have, the more money you receive. Your income and family size determine the amount of the credit, but the maximum credit is $6,269 this year.
- Child Tax Credit: Up to $1,000 for each qualifying child who was under the age of 17 at the end of 2016. This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples earning over $110,000 ($75,000 for singles).
- The Child and Dependent Care Credit: Available if you pay someone to care for your dependent that is under age 13, so that you can work or look for a job. The credit is 20 to 35 percent of your child-care expenses up to $6,000 – the size of your credit depends on your income.
- The American Opportunity Tax Credit: This refundable tax credit for undergraduate college education expenses can help a range of taxpayers, including many with higher incomes and those who owe no tax. The full maximum annual credit of $2,500 per student is available to individuals whose modified adjusted gross income (MAGI) is $80,000 or less, or $160,000 or less for married couples filing a joint return.
- Lifetime Learning Credit: Generally, you can claim this credit if you meet three conditions: you pay qualified education expenses of higher education; you pay the education expenses for an eligible student; and the eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. The credit is worth up to $2,000 and your MAGI must be less than $65,000, or $131,000 for those married filing jointly (MFJ).
2) Deduct Away: If your deductible expenses exceed the 2016 standard deduction limits of $6,300 for single and $12,600 MFJ, you should itemize and grab some of these write-offs (more are available, so be sure to check them all out). Remember, many deductions are reduced if your adjusted gross income (AGI) exceeds $259,400 for single or $311,300 MFJ.
- Medical and dental expenses: You can deduct only the part of your medical and dental expenses that exceed 10 percent of your AGI or 7.5 percent if either you or your spouse is age 65 or older.
- Standard mileage rates: The rate for business use of your vehicle is 54 cents per mile. The rate for use of your vehicle to get medical care or move is 19 cents per mile. The rate for charitable use is 14 cents per mile.
- Miscellaneous deductions: Tax-preparation fees, job-hunting expenses, business car expenses, and professional dues are deductible if they total more than two percent of your AGI.
3) Let Uncle Sam Help You Save for Retirement: When you make a contribution to an Individual Retirement Account (IRA or Roth IRA), the government provides you tax benefits. Your total contributions to all IRAs cannot be more than $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than the dollar limit. If you're covered by a retirement plan at work, you may also be able to deduct contributions to an IRA, subject to income limits (single: $61,000-$71,000, MFJ: $98,000-$118,000).
4) Beware of the Alternative Minimum Tax: The government created the AMT to penalize high-income taxpayers who used allowable deductions and credits to wipe out tax liability. It's an alternative computation of your tax, with different deductions, add-backs and flat rates. You pay the higher of your regular tax or that which computed under the AMT. For individuals, the 2016 exemption begins to phase out at $119,700; for married couples filing jointly, it begins at $159,700.
5) Help Defray Long-Term Care Insurance Costs: The IRS allows for a deduction of a portion of your premiums for this expensive coverage. The deal gets better as you age: If you are over 70, you can deduct $4,870, but if you are under age 40, you can only write off $390.
6) Get Big Help for Your Small Business: If you are a small employer, there is a health care tax credit that can put money in your pocket. For those who have fewer than 25 full time employees; pay average wages of less than $52,000; paid at least half of employee insurance premiums; and purchased coverage through the SHOP marketplace, you will receive a credit on a sliding scale.
Tools/Info: The IRS provides free tax prep software (“Free File”) to taxpayers whose incomes are $64,000 or less in 2016 (which amounts to more than 70 percent of filers); electronic e-filing is available to all taxpayers, regardless of income; the IRS2Go mobile app and the Where’s My Refund? tool allow you to track refunds within 24 hours after the IRS has received an e-filed return or within four weeks after you have mailed a paper return.
Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE): Low-and moderate-income taxpayers (people who generally make $54,000 or less) can get help for free by visiting one of the more than 12,000 community-based tax help sites staffed by more than 90,000 volunteers. To find the nearest site, use the VITA/TCE Site Locator.
The tax preparation process is a great time to consult a CERTIFIED FINANCIAL PLANNER™ professional to help you learn how to become more tax efficient. After all, you have already done much of the heavy lifting by gathering most of your documantation!