Top 10 ways to cut your taxes this year

Posted at 5:24 PM, Feb 09, 2016
and last updated 2016-02-09 18:59:27-05

Taxes again? Didn’t we just give the government tax money last year?

Indeed we did, as we do every year. However, you can give the government less of your money by taking advantage of all the legal tax savings for which you qualify. Here are 10 of the finest ways to hang onto more of your cash in the new tax year.

1. Maximize Retirement Plans – Your greatest tax deferral may come from maximizing contributions to your IRA or 401(k) up to the limits. For the 2015 and 2016 tax years, IRA contribution limits are $5,500 with an extra $1,000 catch-up contribution if you are at least fifty years old, while 401(k) limits for 2015 and 2016 are $18,000 with a $6,000 catch-up contribution limit.

Contributions to IRAs made before April 18, 2016, can be applied to the 2015 tax year as long as you stay below the total annual limits.

2. Itemize Deductions – Do not just assume the standard deduction works best for you. There is a wide range of tax deductions available to you, and they may well add up to tax savings if you properly document and submit them. See IRS Form 1040 Schedule A to look over the possibilities. Do not forget to save the necessary corresponding receipts.

3. Stay Informed – Tax changes come and go every year, and sometimes Congress makes retroactive year-end changes. Stay tuned to the news for any last-minute changes in the tax law that you could use to your advantage.

4. Hunt for Tax Credits – Tax credits are more powerful than deductions, since they are subtracted directly off your tax bill instead of reducing your taxable income. Many tax credits, such as the Earned Income Tax Credit, are targeted toward taxpayers with lower incomes. Check out the possible credits at the IRS website.

5. Make an Educational Investment – By investing in a state 529 program or similar college savings program, you can help your money grow, tax-free, as long as the funds are used for valid educational expenses. Since these programs are established with after-tax dollars, they will not save you money this year on Federal taxes, but many states allow you to take deductions or credits on your state tax return.

6. Take Advantage of Capital Gains – Capital gains are taxed at a lower rate, so take advantage of them at every opportunity — for example, by reinvesting dividends or selling losing stocks to offset capital gains for tax purposes. Losing stocks should be sold before the end of the year to take advantage in that particular year.

7. Check your Filing Status – Married filing jointly or married filing single? It isn’t always obvious which filing strategy works best. Usually a joint filing, but filing separately could reduce your adjusted gross-income (AGI) enough to stay below phase-out limits on deductions.

8. Use Health Savings Accounts (HSAs) – If your health insurance plan is a high-deductible HSA-qualified plan, you may be able to create and use an HSA that allows you to make tax-deductible contributions. When used for qualified medical expenses, withdrawals from an HSA are tax-free. Just like IRA contributions, HSA contributions can be made to the limits up to April 18th, 2016, and applied to your 2015 taxes.

9. Time Events – By moving end-of-year expenses such as mortgage payments and self-employment taxes forward into December, you can apply the deductions to this year. Other possibilities include moving medical expenses forward to consume any remaining funds in a Flexible Savings Account (FSA) and asking for bonuses and payments to be deferred into January if the income will out you over a phase-out threshold.

10. Watch Mutual Fund Distributions – When buying mutual funds, take care to check the distribution date of dividends. If you buy right before dividends are distributed, the shares will fall in value by the distribution amount, but you will be hit with the full tax bill. Buy after the distribution to avoid excess taxes and get a better share price as an extra bonus.

With a little effort you can hold on to more of your money at tax time. Cut your own taxes this year — do not wait for Congress to do it for you. It won't happen.

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