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There are legitimate ways to slash your tax bill

March06

Six Ways to Reduce Your Tax Bill

Although the IRS code is complicated and thorny, there are plenty of legitimate ways to reduce your tax bill. Before you sit down to attack your taxes, grab last year’s return as a reference and then review your W-2s, 1099s, charitable contribution receipts. Additionally, your credit card and bank statements may be useful to jog your memory for unreimbursed business or medical expenses. Then, consider these six concepts:

1) Claim Your Credits: Tax credits provide a dollar-for dollar reduction of your income tax liability, which is why they are the best way to put a dent in your total bill. Just remember that you must claim the correct filing status to qualify for many of these lucrative credits.

  • Earned Income Tax Credit: A refundable credit for married couples with 2016 earned income under $53,505 and singles who made less than $47,955. The more children you have, the more money you receive. Your income and family size determine the amount of the credit, but the maximum credit is $6,269 this year.
  • Child Tax Credit: Up to $1,000 for each qualifying child who was under the age of 17 at the end of 2016. This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples earning over $110,000 ($75,000 for singles).
  • The Child and Dependent Care Credit: Available if you pay someone to care for your dependent that is under age 13, so that you can work or look for a job. The credit is 20 to 35 percent of your child-care expenses up to $6,000 — the size of your credit depends on your income.
  • The American Opportunity Tax Credit: This refundable tax credit for undergraduate college education expenses can help a range of taxpayers, including many with higher incomes and those who owe no tax. The full maximum annual credit of $2,500 per student is available to individuals, whose modified adjusted gross income (MAGI) is $80,000 or less, or $160,000 or less for married couples filing a joint return.
  • Lifetime learning credit income limits: In order to claim this credit of up to $2,000, your MAGI must be less than $65,000 ($131,000 MFJ).

2) Deduct Away: If your deductible expenses exceed the 2016 standard deduction limits of $6,300 for single and $12,600 MFJ, you should itemize and grab some of these write-offs (more are available, so be sure to check them all out). Remember, many deductions are reduced if AGI exceeds $311,300 MFJ or $259,400 for singles.

  • Miscellaneous deductions: Tax-preparation fees, job-hunting expenses, business car expenses, and professional dues are deductible if they total more than two percent of your adjusted gross income.
  • Medical and dental expensesYou can deduct only the part of your medical and dental expenses that exceed 10 percent of your AGI or 7.5 percent if either you or your spouse is age 65 or older.
  • Standard mileage ratesThe rate for business use of your vehicle is 54 cents per mile. The rate for use of your vehicle to get medical care or move is 19 cents per mile. The rate for charitable use is 14 cents per mile.

3) Let Uncle Sam help you save for retirement: When you make a contribution to an Individual Retirement Account (IRA or Roth IRA), the government provides you tax benefits. Your total contributions to all IRAs cannot be more than $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than the dollar limit. If you’re covered by a retirement plan at work, you may also be able to deduct contributions to an IRA, subject to income limits (single: $61,000-$71,000, MFJ $98,000-$118,000).

4) Beware the Alternative Minimum Tax: The government created the AMT to penalize high-income taxpayers who used allowable deductions and credits to wipe out tax liability. It’s an alternative computation of your tax, with different deductions, add-backs and flat rates. You pay the higher of your regular tax or that computed under the AMT. For individuals, the 2016 exemption begins to phase out at $119,700; for married couples filing jointly, it begins at $159,700.

5) Help Defray Long-Term Care Insurance Costs: The IRS allows for a deduction of a portion of your premiums for this expensive coverage. The deal gets better as you age: If you are over 70, you can deduct $4,870, but if you are under age 40, you can only write off $390.

6) Get Big help for your Small Business: If you are a small employer, there is a health care tax credit that can put money in your pocket. For those who have fewer than 25 full time employees; pay average wages of less than $52,000; paid at least half of employee insurance premiums; and purchased coverage through the SHOP marketplace, you will receive a credit on a sliding scale.

Tools/Info:

  • 3 Extra Days: The tax -filing deadline is April 18, rather than April 15th, so procrastinators will have an extra three days to dawdle
  • Free Software: The IRS provides free tax prep software (“Free File”) to taxpayers whose incomes are $64,000 or less in 2016 (which amounts to more than 70 percent of filers) – electronic e-filing is available to all taxpayers, regardless of income
  • Tracking Resources: The IRS2Go mobile app and the Where’s My Refund? tool allow you to track refunds within 24 hours after the IRS has received an e-filed return or within four weeks after you have mailed a paper return
  • Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE): Low-and moderate-income taxpayers (people who generally make $54,000 or less) can get help for free by visiting one of the more than 12,000 community-based tax help sites staffed by more than 90,000 volunteers. To find the nearest site, use the VITA/TCE Site Locator

Scam/Fraud Alert: The IRS saw an approximate 400 percent surge in phishing and malware incidents in the 2016 tax season, which is why it is important to underscore these security reminders:

  • The IRS does not initiate contact with taxpayers by email or through social channels to request personal or financial information. The agency is aware of email phishing scams that appear to be from the IRS and include a link to a bogus web site intended to mirror the official IRS web site. These emails contain the direction “you are to update your IRS e-file immediately.” The emails mention USA.gov and IRSgov (without a dot between “IRS” and “gov”). Don’t get scammed. These emails are not from the IRS. If you get a message that looks suspicious, do not respond to the email or click on the links. Instead, forward it to the IRS at phishing@irs.gov.
  • The IRS will never call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail you a bill if you owe any taxes.
  • The IRS does not threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
  • The IRS does not demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owes and never asks for credit or debit card numbers over the phone.

Examples of recent tax scams include:

  • Fake IRS tax bills related to the Affordable Care Act, which involves a fraudulent version of CP2000 notices for tax year 2015.
  • Telephone scammers targeting students and parents demanding payments for non-existent taxes, such as the “federal student tax.”
  • “Robo-calls” where scammers leave urgent callback requests through the phone telling taxpayers to call back to settle their “tax bill.” In the latest trend, IRS impersonators demand payments on iTunes and other gift cards.
  • Posted by Jill Schlesinger
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