Just finishing your tax return for 2015 and it’s not looking too good? Well, there isn’t much you can do now to fix last year’s return but here are five ideas you can use to make sure 2016 is a better year between you and the IRS.
1. Increase retirement plan contributions at work. If your employer offers either a 401(k), TSP, 403(b) or 457 plan you have the opportunity to lower your taxable income while saving for retirement. Ask your tax advisor and human resources at work to make sure your plan allows tax deductible contributions. If so, and you are under age 50, you can contribute up to $18,000 a year. If you are over age 50 you can contribute up to $24,000 per year. Not everyone is able to save this much, especially if they have other obligations, so just save what you can. Your tax advisor can tell you how much you save on your taxes by increasing your deferral. Your retired self will thank you one day.
2. IRA contribution. This works just like the plan through work but you set up an account at any IRA custodian, such as an investment provider or a bank. There are income limits here if you participate in the plan at work and they can get a little complicated but if your financial advisor or tax advisor does the calculation and you can make a deductible contribution, then that is another $5,500 for those under 50 and $6,500 for over age 50.
3. This is a big one, Health Savings Accounts. More and more people now have what’s called a high deductible health insurance plan, meaning you are out of pocket much of the cost of your care before the insurance kicks in. For single plans in 2016 the minimum deductible is $1,300 and for families it is $2,600. These high deductible plans triggered the creation of HSA’s, in which you can deposit money to an account on a pre-tax basis, and then use it tax free for medical expenses. This is not like the old Flexible Spending Accounts where you had to spend what you saved every calendar year. With a HSA you can keep the money in the HSA account until you need it. If you are single you can accumulate $3,350 and for a family $6,750 in your HSA. If the policyholder is over age 55, the accumulated amount increases $1,000 on top of both these figures. Regardless of when the money is used for a qualified medical expenses, now or in the future, it is tax deductible now.
4. Short on money but have a lot of stuff? Donate it. There are lots of organizations that can use things like clothes, appliances, working stuff like bikes and so on. Keep a good inventory of everything you donate, make sure it is to an organization that allows for it to be deemed a donation, and always keep in touch with your tax advisor. Maybe even take a picture of anything you intend on donating for your records.
5. The last one is called the Lifetime Learning Credit. Often times people don’t complete a college degree by going full time for four years. They also go for more specialized certificates and training programs throughout their careers at creditable universities. With that in mind and as a result of the American Opportunity Tax Credit, or AOTC, there is the possibility to get a tax credit for some of the cost of these programs. It can be up to $2,500 of a credit which is different than a deduction. A credit is a dollar for dollar reduction in the tax due. There are income phase outs for this of $80k single filer and $160k married and a variety of other requirements to qualify. But look into this and see if you can get some of the government’s money to fund your education costs.
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Brian Kuhn is the manager of PSG Clarity with Planning Solutions Group, which focuses on affordable and efficient financial planning. He is a CERTIFIED FINANCIAL PLANNER™ (CFP®), Chartered Life Underwriter (CLU®), and Certified in Long Term Care (CLTC). He focuses on retirement planning, investments and insurance protection, with a special interest in assisting public sector employees. He is the author of two books; Total Compensation: A Practical Guide to Federal Employee Benefits, and The Personal Finance Handbook, both available through Amazon. He has contributed articles to or been quoted on personal finance by the WSJ, USNews.com, Yahoo Finance, HuffingtonPost and Fedsmith.com among others. PSG Clarity is a division of Planning Solutions Group. To email Brian: firstname.lastname@example.org