Aside from earning less – which probably isn’t a great alternative – the best way to lower your tax bill is to make sure you claim all of the deductions and credits you deserve, says Lisa Greene-Lewis, a CPA at TurboTax. Knowing what you can write off and keeping good records throughout the year will improve your odds of trimming your tax bill.
Here are some commonly overlooked credits and deductions (note that you must itemize to take advantage of the starred write-offs):
- If you pay for dependent care: Working parents can claim a credit of up to $3,000 for qualified childcare costs for children who are disabled or who are under age 13 at the end of the year.
- If you’ve made certain energy efficient home improvements: Many energy credits expired in 2013 but credits for installing residential wind turbines, solar power and geothermal live on through 2016. Credits are worth up to 30% of the cost, with no cap.
- If you pay for college: The American Opportunity Credit (formerly Hope) takes up to $2,500 off your tax bill per year for four years if you’ve paid eligible post-secondary education costs. The full credit is available for joint filers with less than $160,000 in adjusted gross income ($80,000 for single filers). You may also be able to claim the Lifetime Learning credit, worth $2,000, for other years; the credits are mutually exclusive.
- If you save for retirement: Any contributions made to a 401(k) are pre-tax—meaning you won’t get a deduction, but you will remove the money from your taxable income from the current year. In addition, you can deduct up to $5,500 in contributions to a traditional IRA ($6,500 if you’re 50 or over. And, if you’re self-employed, you can deduct up to $52,000 (or 25% of compensation) in SEP IRA contributions for 2014. “That’s a huge tax benefit,” says Los Angeles CPA Rob Shelter. In addition to these deductions, if your income is less than $27,500 ($55,000 for joint filers) you may also claim the Saver’s Credit of up to $1,000 ($2,000 for couples) for contributions to qualified retirement plans.
- If you have student loans: You can deduct up to $2,500 in interest, though benefits begin to phase out for joint filers with modified adjusted gross income over $120,000 ($60,000 for singles).
- If you have a health savings account as part of a high-deductible health insurance plan: Families with qualified plans can deduct up to $6,500 ($3,300 for singles) in contributions made to HSAs. The money can be rolled over to other years and used for a range of qualified expenses.
- If you had expenses related to moving or a job search: If you moved more than 50 miles for a job within a year of starting a new job, you can deduct expenses related to the move, including mileage, lodging, moving services and supplies.
- If you paid interest on a mortgage*: You can deduct interest on your primary residence and a second home that is used primarily for personal use. The deduction is only good for up to $1 million in combined loan balances. You can also deduct interest on home equity loans and lines of credit with limits up to $100,000.
- If you paid points on a mortgage*: If you buy a new home, you can deduct any points you pay to secure the mortgage in a single year. If you refinance, notes Greene-Lewis, you need to spread those points over the life of the loan – though you get to deduct them all at once if you refinance again.
- If you paid taxes*: Odd as it seems, you can deduct certain taxes, including property tax on your primary residence, and state and local income taxes.
- If you had expenses from being self employed: For more, see “What Kind of Expenses Can I Write Off If I’m Self Employed?”
- If you gave money to charity*: Altruism can pay off at tax time because you can write off what you give. In 2011, taxpayers with adjusted gross income between $50,000 and $100,000 deducted $2,881 in charitable contributions. To make sure you get the write-off you deserve, be sure to keep documentation of your gifts.