After tax season starts in early January, people begin to divide themselves into two camps: Those who file early with visions of refund dollar-signs dancing in their heads, and those who put it off, not wanting to rush the process of giving Uncle Sam their money — especially if they don't expect to get anything back.
Green alert: You don't have to leave it up to fate, or to the W-4
you filled out way back when, to surmise whether you'll get a break you can boast about. Instead, look to things like your income level, relationship status, and savings options for a tax break backup plan. There's still time to make the best of all those things, even with the April 18th filing deadline fast approaching. Here's how.
The Retirement Savings Contribution Credit, or Saver's Credit, is ideal for people with a lower income or those just starting out, according to Joe O'Boyle, an advisor and retirement coach for Voya Financial Advisors. Unlike a tax deduction, which reduces your tax liability
based on your tax rate or bracket, a tax credit reduces how much you pay in taxes on a dollar-for-dollar basis, he explains.
"For example, a $1,000 tax credit reduces your tax bill by a full $1,000, whereas a $1,000 tax deduction might only reduce your taxes by $250 if you're among those whose income falls into the 25% tax rate," says O'Boyle.
For the 2016 tax cycle, people who earned less than $18,500
can write off up to half of their IRA contribution when filing. Those who earned between $18,501 - $20,000 can write off up to 20% of that contribution, and people with earned income between $20,001 - $31,000 can write off up to 10%. More
Marriage has its benefits, including tax breaks. A single person with a Roth IRA in 2016 could have deposited up to $117,000 into their account. After marriage, that threshold rises to $184,000—a pretty significant increase.
You can partake even if you said "I do" fairly recently — even as recently as December 31, 2016, O'Boyle says. "If you got married on the last day of 2016, you are considered married when you file your taxes [this year]."
If you're like a growing percentage of working millennials, you might be
pushing more money into a high-deductible health plan and using an HSA — or a health savings account — to manage medical expenses such as copays, deductibles, and coinsurance payments.
Although people with high-deductible health plans run the risk of footing a large medical bill out of pocket if a problem hits, they are left with more money on a day-to-day basis in the short term. Plus,
unlike money in FSAs, unused HSA funds can roll over into the next year — or you can eke out a tax benefit with any money you leave in the account.
If you're single, you can contribute up to $3,350 into your HSA, pre-tax, up until the April 18th filing deadline. (The 2016 contribution limit for families is $6,750.) That money can then be used to reduce your taxable income, so if you're making $50,000, for example, and contributed the full $3,350 into your HSA as a singleton, you'll only pay taxes on the remaining $46,650 of your income, O'Boyle says.
An increasing number of people are turning to side gigs to make ends meet — and they, too, can reap the savings and tax rewards of an IRA.
"If you're part of the 'gig economy' and have 1099 independent contractor income, you can fill out a form called a Schedule C on your tax return," O'Boyle says. To do that, take the 1099 income you earned, subtract any expenses you had for that income (so nail down any receipts!), and you can contribute up to 20% of that net income or net profit toward a SEP IRA (a Simplified Employee Pension IRA).
"The nice thing about a SEP IRA contribution is that it simultaneously reduces your tax liability and bolsters your retirement savings," O'Boyle explains.
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The last day to file personal taxes is April 18 for individuals and March 15 for people who own their own businesses. But if you want more time to reap the rewards of the SEP IRA, file an extension (March 15th for business owners and April 18th for personal taxes), and keep hoarding money a little while longer. If you file an extension, you can contribute to your SEP IRA as late as October 15th of this year, O'Boyle says, and the corporate filing extension deadline is September 15th.
"We have clients who'll have all their taxes done, but they'll say, 'Oh, I'm trying to put $15,000 into my SEP IRA this year but I don't have it available right now, so I'm going to file an extension and make that contribution before either the September or October deadline," he notes.
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