Each year eight out of 10 people get a tax refund of more than $2,500. However, there are still millions who owe taxes instead. Are you one of them? Here are a few ways to reduce what you may have to pay.
Give more to yourself
Reducing your gross income is a great way to lower your taxes. You can do this by contributing to your employer-sponsored retirement plan. The amount you contribute, up to a limit, will not be included in your tax figures when completing your returns. You will still pay FICA taxes (Social Security and Medicare) if your employer participates, but will avoid ordinary income taxes on contributions. In 2016 you can contribute up to $18,000 to your 401(k) or similar retirement savings plan. That amount goes up to $24,000 if you are 50 or older by the end of the year.
Do more with pre-tax dollars
Participate in your employer-sponsored flexible spending account (FSA) if your employer offers one. If you think you’ll incur a lot of medical expenses during the year, an FSA allows you to set aside payroll income, before taxes, to pay for those expenses. In 2016 you can contribute up to $2,500 to this account. Discuss the details of an FSA with your human resources representative.
Change your withholdings
One reason you may owe money to the IRS is you’re not withholding enough money from your paycheck. Withholding less means more take-home pay with each paycheck, but it also increases your chances of owing money to the government at tax time. Use the IRS withholding calculator to help you figure your federal income tax withholdings and make sure your employer is withholding the correct amount from your pay. If not, update your W-4.
Consider itemizing deductions
Ask your tax advisor about available deductions for things like Traditional IRA and qualified pension contributions, student loan interest and medical deductions. While the standard deduction is certainly easier, it may be better to itemize. Expenses that can be itemized include mortgage interest, property taxes, charitable contributions, state and local income taxes and medical expenses.
To determine if itemizing would be worthwhile, use Schedule A of IRS Form 1040 to see how the numbers add up. If you’re still not sure, calculate your tax with the standard deduction and compare to Schedule A, then use the method that gives you the higher amount. Also, what is allowable for itemization on federal returns can be different on state returns.
Don’t forget tax credits
There are a number of tax credits available that can impact your tax liability, dollar for dollar. If you have a family or dependents, explore the Child and Dependent Care Credit, Child Tax Credit, and the Earned Income Tax Credit. There are credits available for health care, education, savings, and environmental concerns. Credits go directly against taxes due, so don’t let these get by you!
File and make tax payments on time
If you owe taxes, there are penalties for filing your return late and for not making the tax payment. If you can’t file on time, apply for an extension to get six additional months to file and to avoid the failure to file penalty. You will still be responsible for paying taxes due, however. If you cannot pay the entire amount due, consider an unsecured personal loan from LGFCU to pay your bill in full, rather than make installment payments to the IRS. This way you can avoid paying both interest charges and late-payment penalties on those amounts paid late.
This advice is for information purposes only. Contact your tax advisor for additional guidance.