Want to lower your 2015 tax bill? A number of opportunities to offset prior-year income and capture credits are still available until the April 18 tax filing deadline.
First of all, take note: Taxpayers have a few extra days to get their 2015 income tax returns in this year. The filing deadline, which normally falls on April 15, is extended through April 18, since Washington, D.C., celebrates Emancipation Day on Friday, April 15 (and due to Patriots’ Day, the deadline is Tuesday, April 19, in Maine and Massachusetts).
Before Dec. 31, taxpayers looking to minimize their 2015 tax liability could defer income, accelerate deductions, and sell off losing stocks to offset capital gains — a concept known as tax loss harvesting.
“There were a whole host of tax moves you could make before the end of the year,” said Paul Morrone, a certified public account and financial planner for U.S. Wealth Management in North Haven, Conn., in an interview. “Most have expired, but not all.”
Those that remain, he said, revolve primarily around retirement plan contributions, tax credits, and penalty avoidance.
Retirement Plans: Retroactive Contributions
Your traditional Individual Retirement Account, or IRA, offers the biggest potential bang for the buck.
The Internal Revenue Service allows taxpayers to make deductible prior-year contributions all the way up to the tax filing deadline.
For 2015 and 2016, total contributions to all of your traditional and Roth IRAs cannot be more than either $5,500 ($6,500 for those age 50 and older), or your total compensation for the year if you earned less than that amount.
Deductible contributions could save you big. A taxpayer in the 25 percent federal and 5 percent state brackets, said Morrone, “effectively gets a 30 percent return right out of the gate by virtue of a reduction in their federal and state tax bill.” On a $5,500 contribution, that amounts to a $1,650 tax savings.
Your actual tax deduction, however, may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels.
The deduction begins to phase out for single tax filers who made more than $61,000 last year and disappears completely at $71,000 and beyond — $98,000 and $118,000 respectively for married taxpayers who file jointly.
Eligible taxpayers can also make retroactive contributions to their Roth IRA until April 18. Different phase-out limits apply for Roth contributions.
Because Roth IRAs are funded with after-tax dollars, that won’t yield a current year tax benefit, but it may produce a better return since earnings upon retirement can be distributed tax free.
Simplified Employee Pension IRA account holders who get an extension to file can potentially delay their contribution further still, until Oct. 17, 2016.
Contributions to a SEP-IRA, geared for small business owners and the self-employed, cannot exceed the lesser of 25 percent of total compensation, or $53,000 for 2015.
“If you had a business in 2015, the SEP may be a terrific way to receive a deduction and save for retirement with contribution limits well over those available with regular IRAs,” said Elliot Herman, a certified financial planner and certified public accountant with PRW Wealth Management in Quincy, Mass., in an interview.
Tax Deductions: Roll Up Your Sleeves
Most taxpayers take the standard deduction, a fixed dollar amount set forth by the IRS that reduces the amount of income on which they are taxed.
Why? Because it’s a lot less work. You don’t have to keep track of your expenses, or individually deduct them on IRS Schedule A. For 2015, the standard deduction for single filers is $6,300 and $12,600 for married taxpayers filing jointly.
But if you own a home, have high medical expenses or were out of work for much of the year, you could save far more by itemizing your tax deductions instead.
Expenses that can be itemized include, but are not limited to: medical expenses that exceed 10 percent of your adjusted gross income (AGI) (7.5 percent if you or your spouse were born before 1/2/1951), state and local income taxes, real estate and personal property taxes, home mortgage interest, charitable contributions (subject to certain limitations), and unreimbursed business expenses, including the costs associated with finding employment.
According to the IRS, you are subject to the limit on certain itemized deductions if your AGI is more than $309,900 for married joint filers, $284,050 for heads of household, $258,250 for singles, or $154,950 for married taxpayers filing separately.
The only thing worse than giving Uncle Sam his due, is leaving a tip.
To avoid a potentially hefty late-filing penalty, you must submit your income tax return on time, regardless of whether or not you can afford to pay.
Indeed, the failure-to-file penalty amounts to 5 percent of your unpaid taxes for each month or part of a month that your tax return is late, up to 25 percent of your unpaid taxes.
By comparison, the penalty for failure-to-pay is far less: one-half of 1 percent of your unpaid taxes for each month or part of a month for which your balance is unpaid after the due date.
If you can’t afford to pay your taxes in full, you can reduce additional interest and penalties by paying as much as you can with your tax return, according to the IRS.
Remember, too, that simple mistakes on your tax return may result in a rejected claim or underpayment of your balance due, which opens the door to late-payment penalties.
According to the IRS list of common errors, the most common errors include missing signatures, math errors, insufficient postage, and incorrect identification information such as name, taxpayer identification number and current address. Others select the wrong filing status, forget to date their return, or check the wrong exemption boxes for their personal, spousal and dependency exemptions.
Double-check before you file to minimize risk of costly penalties.
Submitting your tax return electronically ensures greater accuracy than mailing it in since the IRS e-file system flags common errors and kicks back returns for correction.
When it comes to lowering your taxable income, you are your best advocate.
Tax deductions, which reduce the amount of your income subject to tax, are great, but tax credits, which reduce your tax bill dollar for dollar, are even better. So don’t leave any tax credits or deductions for which you are eligible on the table.
Families with dependent children may be eligible to claim a credit of up to $1,000 per child under the Child Tax Credit.
If you paid for someone to care for your child, spouse or dependent so you could work or look for a job, you may be able to claim the Child and Dependent Care Credit. The amount of the credit is a percentage of the amount of work-related expenses you paid to a caregiver, and is based on your income. Total expenses may not exceed $3,000 for one individual or $6,000 for two or more qualifying individuals, and the total credit may not exceed 35 percent of expenses.
Low- to moderate-income taxpayers, especially families, should check to see if they can claim the valuable Earned Income Tax Credit. For the current filing year, the maximum credit for those with no children is $503, while those with one child may receive a credit of $3,359, two children $5,548, and three or more children $6,242. To qualify you must meet certain federal requirements and file a tax return, even if you owe no taxes.
Taxpayers with adjusted gross income that did not exceed $30,500 in 2015 ($61,000 for married filing jointly) may also be able to claim the Retirement Savings Contributions Credit, or Saver’s Credit, which provides a credit up to $2,000 ($4,000 for married filing jointly) for amounts they voluntarily save for retirement, including amounts contributed to their IRAs, 401(k) plans and other workplace plans.
Similarly, those paying for higher education expenses may be able to claim one of two tax credits: the American Opportunity Tax Credit, which provides up to $2,500 in tax credits on the first $4,000 of qualifying education expenses, or the Lifetime Learning Credit, which may be as high as $2,000 per eligible student. You cannot claim both credits in the same year.
If you haven’t yet filed your tax return for 2015, there’s still much you can do to minimize the amount you may owe.
By taking advantage of tax-favored retirement tools, filing an accurate return, and educating yourself on available deductions and credits, you might just save enough to pay off your credit card debt or catch a flight somewhere warm.