10 Ways to Lower Your Tax Bill
By Lisa Greene-Lewis
As the end of the tax season approaches, many people are looking for ways to make last-minute tax moves by April 15 and save money on their returns. Luckily, taxpayers can still take advantage of some easy ways to lower their tax bill.
Here’s the scoop on 10 ways to save come this April and even year-round:
1. Earn tax-free income. Some income or benefits may not be subject to income tax, and by earning more tax-free income, you can lower you tax liability. A few simple ways to do this includes investing in bonds, depositing money in a tuition plan for your child’s education, opening a health savings account or taking advantage of certain benefits offered by an employer such as health benefits, life insurance, disability insurance, dependent care assistance and educational assistance.
2 . Flex your spending power. To save money on your tax bill, you might need to spend money elsewhere. Many employers offer a benefit that allows employees to lower their tax bill by using money they had planned on spending anyway, such as dependent care or medical expenses. These plans will let you divert part of your salary to an alternative account which you can then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money, saving you 20 to 35 percent or more. The maximum you can contribute to a health savings account is $2,500.
3. Pay child care bills with pre-tax dollars. If your employer offers benefits like a dependent care assistance plan, you may be able to use pre-tax dollars to pay for your child care. That can save you one-third or more of the cost, since you will avoid income tax on benefits up to $5,000.
4. Take advantage of home office deductions. If you use part of your home for business, you may be eligible for the new home office deduction. The simplified option allows you to take a deduction up to $1,500 based on $5 per square foot for up to 300 square feet of the area of your home used for work.
5. Keep track of your job-hunting expenses. If you were unemployed last year, make sure you have receipts for your job-hunting costs in front of you when you sit down to prepare your taxes. As long as you were looking for a new position in the same line of work, you may be able to deduct job-hunting costs, including travel expenses such as the cost of food, lodging and transportation. These expenses are itemized deductions and are deductible if they exceed 2 percent of your adjusted gross income.
6. Go green. A tax credit is available for homeowners who have installed alternative energy equipment. Homeowners may claim 30 percent of what they spent on qualifying property, such as solar energy systems, geothermal heat pumps and wind turbines, including labor costs. There is no cap on this tax credit, which is available through 2016.
7. Boost your 401(k) retirement savings. Your contributions to a qualified 401(k) may lower your tax bill and help you build financial security. You can contribute to up to $17,500 to your 401(k) (or $23,000 if you are age 50 or older by the end of the year). Money contributed to the plan is not included in your taxable income.
8. Maximize your individual retirement account contributions. IRA contributions may reduce your taxable income, and you have until the date you file your taxes to contribute to a traditional IRA for the previous tax year. If you contribute to an IRA or 401(k) you may also be able to claim the retirement saver’s credit of up to $1,000 for singles and $2,000 for couples, which lowers your tax liability and results in a larger refund check.
9. Make charitable donations. To earn tax deductions and help those in need, consider donating goods that you no longer use. From clothes and old toys, to electronics, books and furniture, there are a multitude of donations you can deduct. Mobile apps like ItsDeductible can help you keep a list of what you donate throughout the year and provide an estimated value of donated goods such as clothing, furniture or supplies. Remember that any donation worth more than $250 will require a receipt, and there are limits if you donate more than 20 percent of your adjusted gross income.
10. Think about next year. With some advance planning, you can get a head start on next year’s taxes, and take the opportunity to do some things mentioned above you may have missed which can help put you in better shape next tax season.
There’s a lot you can do between now and April 15 to lower your 2013 tax bill. By claiming all credits and deductions for which you are eligible, you can cut your taxable income down considerably and keep more of your hard-earned money.