5 Ways to Pay Less in Taxes Next Year
Simple changes now can help you keep more of your income and escape a big tax bill later
If you found yourself writing a big check to the U.S. Treasury when you did your income taxes this year, you might be missing out on some easy opportunities to save money. These five steps can help trim your tax bill next April 15 — and the earlier you get started, the better.
1. Boost your retirement plan contributions. If you’re eligible for a 401(k) or similar plan where you work, the more you kick in, the more you’ll save on taxes. For 2015, people under age 50 can contribute a maximum of $18,000, while those over 50 can add an additional $6,000, for a total of $24,000, according to the Internal Revenue Service (IRS). The money you contribute is subtracted from your taxable income, though you’ll be taxed on it later, when you withdraw it in retirement.
Related: 7 Tips for Filing Your Taxes Safely
2. Take advantage of flexible spending accounts (FSAs). As with a retirement account, any money withheld from your paycheck and deposited into an FSA reduces your taxable income. There are two types: one that will reimburse you for eligible health care costs, the other for dependent care. Currently you can put up to $2,550 in a health FSA and $5,000 in a dependent care one, the IRS says. Bear in mind that you must use up the money in your accounts by the end of the calendar year or you’ll forfeit what’s left.
Some employers offer similar plans to cover eligible mass-transit and parking expenses. Unlike health and dependent care accounts, the money in those plans generally can be rolled over from year to year.
3. Delay income. If you run your own business and have the flexibility to determine when you’re paid, you might be able to save on taxes — or at least postpone paying them, says Julian Block, a tax attorney and author. For example, if you bill a customer in early 2016 for work you did in 2015, you won’t have to declare that income until you file your 2016 taxes in 2017. Deferring income could make even more sense if you expect to have less of it and be in a lower tax bracket next year than you are now — for example, if you plan to go back to school, stay home with kids or retire.
The opposite is also true: If you’ll be in a higher bracket next year, it could be better to collect that income and pay the taxes on it now, Block advises.
4. Don’t lose any deductions. Many taxpayers who itemize their deductions overlook some common breaks they’re entitled to, says Block. For example, he notes, people who do volunteer work often neglect to deduct their out-of-pocket expenses, such as unreimbursed transportation costs. Many others, he says, forget the taxes they paid with last year’s state tax return can be deductible on this year’s federal return. The IRS explains the deductions you could be eligible for on its website.
The medical expense deduction can also be worth a look, Block says. If you’re under 65, your unreimbursed medical and dental expenses must exceed 10 percent of your adjusted gross income before any of them are deductible (for people over 65, it’s currently 7.5 percent, though that will rise to 10 percent in 2017). Under normal circumstances, you might not qualify, but if you’re anticipating a big medical or dental bill, such as for a child’s orthodontia, it could put you over the top.
5. Adjust your withholding. If the money that’s withheld from your paycheck throughout the year comes close to covering your tax bill, you won’t be writing another big check next April 15. You’ll also avoid the possibility of having to pay even more tax in the form of an underpayment penalty. To change your withholding, just fill out a new W-4 form at work.