Tax Advice 2017: Save like a boss with these 3 lesser-known tips for tax year 2016
Think you've already taken every step to make the most of the 2017 tax filing season? Think again. There are still lots of ways to maximize your refund for the 2016 tax year by the April 18 tax day deadline.
In fact, you could be leaving thousands of dollars on the table by not taking a few extra tax deductions and credits, Lisa Greene-Lewis, CPA and tax expert at TurboTax, said to Mic by phone. "There are a number of missed opportunities people may not be aware of or think it's too late," Greene-Lewis said.
Almost all of these tax saving strategies can be implemented up to April 18. Happy hunting!
1. Take the home office deduction if you work remotely
Not everyone who works from home takes the tax deduction because they fear it sends a red flag: "Meaning you might get audited," Jean Chatzky, co-author of AgeProof: Living Longer Without Running Out of Money or Breaking a Hip, said by phone. "But as long as you have the documentation, its worth taking the deduction."
Indeed, "taking the home office deduction doesn't have to be scary," Greene-Lewis said. "A few years ago the IRS came up with a simplified method, where you can deduct a flat $1,500 for up to 300 square feet of a home office workspace at $5 per square foot." To understand how much money that big deduction will save you, read this explanation.
Previously, the only way to take the home office deduction was to deduct a portion of your home office rent or mortgage interest, taxes, utilities and repairs based on the square footage of your home used for office space. The IRS introduced the new version because many eligible taxpayers were not taking the home office deduction, Greene-Lewis said. Math is intimidating.
But while the simplified version makes home office filing less nerve wracking, Greene-Lewis said, you save far more going the old route. "You see a bigger savings if you deduct a portion of your mortgage interest, property taxes, utilities, rent or repairs," she explained.
For example: Let's say your home costs for the year — whether rent or ownership costs — are $20,000, Greene-Lewis said: "If you used 15% of your home for your home office, which is the 300 square feet divided by 2000 square feet, that alone would give you a deduction of $3,000... more than the flat rate, without even including utilities and repairs of your home office."
2. Score a deduction and save with an HSA
Health savings accounts, or HSAs, are tax-advantaged savings accounts meant to fund health expenses. But savers aren't optimizing their HSA to their benefit, Chatzky said.
"The good news is there's still time to open an HSA on your own and contribute up until the April 18 tax deadline," Greene-Lewis said. "HSAs are great vehicles and offer the same benefits of a 401(k) but very few people have turned on that option to invest."
Make sure your plan administrator knows the contribution is for 2016, just as you would an IRA contribution. "If you have a high deductible on your health plan, whether or not your employer makes a contribution, do your best to put some money in an HSA every year," she said.
The maximum amount you can invest in an HSA each year is $3,350 for individuals; when you file an "above the line tax deduction" you don't need to itemize — it just takes the amount off your income, Greene-Lewis said. Sweet.
Plus you can build a nice nest egg. Contributing to an HSA means if you don't use the money you contributed that year, you can invest it and allow it to grow. "Over time that money becomes a supplementary account," Chatzky said. "If you use the money for healthcare, you don't have to pay taxes on it, plus once you reach age 65, you can use the money for anything, like a 401(k)."
3. Take those credits "no one" thinks of taking
Deductions are great, but credits are even better, Greene-Lewis said. Some of the easiest credits to take, but most miss, include the earned income tax credit (EITC), the lifetime learning credit and the IRA savers credit.
The difference between a tax credit and a deduction is the credit is subtracted directly from your tax liability and not taxable income. Credits reduce your taxes dollar for dollar, whereas the deduction reduces your taxable income by the amount.
"Only one in five people who are eligible for the earned income tax credit take it," Greene-Lewis said. "Most people think this credit is just for people who have kids, but that isn't necessarily true." Individual filers who don't claim a child you are eligible for the earned income tax credit if they earned $14,880 in 2016 ($20,430 for married or joint filers).
Students can qualify for the lifetime learning credit if their modified adjusted gross income amounts to no more than $65,000 for individual filers ($131,000 for married joint filers) for 2016. This credit could provide up to $2,000 (20% of the first $10,000 in tuition and educational expenses) back on taxes, according to The Motley Fool.
Eligibility includes being enrolled at an educational institution with the purpose of obtaining a degree for at least one academic period per tax year. Because this credit is non-refundable, it could take your tax liability down to $0, which makes this credit valuable to those who owe on their taxes.
"The saver's credit is an additional credit you get for just contributing to your retirement, worth up to $1,000 single and $2,000 married filing jointly, but only one in four who are eligible take the credit," Greene-Lewis said. "The credit is the only place the IRS allows you to double dip. Even though you are a millennial you may think you have a lot of time to save for retirement, but why not increase your nest egg, get a deduction and a credit on top of that."
Savings depends upon your tax bracket and could lower your taxable income by a few hundred dollars or, if you apply the saver's credit it could be even more. Those who are age 18 or older, not a full time student and not claimed as a dependent on another person's tax return are eligible for the saver's credit.
The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income, according to the IRS.
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