2016 Year-End Tax Saving Strategies

2016 Year-End Tax Saving Strategies
Eileen St. Pierre, The Everyday Financial Planner

dog doing taxesBefore you head out the door for that holiday party, take a minute to think about ways to reduce your 2016 taxes. Like last year, you’ll have an extra weekend to get your taxes done. April 15, 2017 is a Saturday, and Emancipation Day (a legal holiday in Washington D.C.) will be observed on April 17. This means the tax filing deadline will be extended to Tuesday, April 18.

Even if you use tax preparation software or have someone else do your taxes, it’s wise to be aware of all available tax credits and deductions. If you aren’t asked about an expense, you might forget you shelled out your hard-earned cash for it.

Pay Yourself First.

It’s always a good idea to make a year-end contribution to your IRA. Actually, you have until April 18, 2017, to make all of your 2016 contributions. If you don’t have an IRA, now is a great time to start one.

  • You can contribute up to $5,500 ($6,500 if you are age 50 or over) this year. The contribution limits will not change for 2017.
  • Only contributions to traditional IRAs will lower your taxes this year. Roth IRA contributions are made with after-tax income (money that’s already been taxed), but you will get to withdraw the money tax-free in retirement.
  • You may also want to consider making extra payments at the end of the year into your 401(k), 403(b) or 457 plans. With these plans, you can contribute up to $18,000 ($24,000 if you are age 50 or over) this year. Like IRAs, contribution limits are the same for 2017.
  • You may be eligible for the Saver’s Credit – up to $1000 for individuals with incomes up to $30,750. Married couples with incomes up to $61,500 can get up to a $2000 credit. Couples should split their contributions between accounts to maximize their Saver’s Credit. File Form 8880.
  • Visit my Retirement Planning page for more information.

Don’t Overlook Deductions!

The end of the year is also a good time to make any planned charitable contributions, especially if you itemize on your tax return. Check out my Charitable Giving financial column for more information.

If your property taxes are due in January, consider paying them before the end of the year to increase your Schedule A deductions. Homeowners may want to pay their January mortgage in late December in order to take an additional deduction for interest paid. Just make sure the payment is processed before the end of the year so the interest amount gets reported on your 1098 form.

Maximize Tax Credits.

If you lost your job in 2016, do not overlook filing for the Earned Income Tax Credit (EITC) if you qualify. A married worker with 3 children who earned less than $53,505 could qualify for up to the maximum credit of $6,269.

  • What’s great is that this tax credit is refundable, which means you’ll receive the full amount of the credit as a refund, even if you pay no taxes.
  • Save those receipts! Job-hunting expenses can qualify as itemized deductions.

The tax credit for installing energy-efficient windows, doors, furnaces, and related items is back! You can get up to 10% of the cost up to $500 or a specific amount from $50-$300. Only existing principal residences qualify. New construction, secondary homes, and rentals do not qualify.

  • The tax-credit for installing geothermal heat pumps, small residential wind turbines, and solar energy systems is still around. The tax credit is for 30% of the cost of installation (no upper limit). New and existing homes qualify – both principal residences and secondary homes. Rental homes do not qualify.
  • All these tax credit are set to expire December 31, 2016.
  • Visit energystar.gov for more information.

Other tax credits include:

For many people, their tax refund is the most money they have ever received at one time. Take advantage of this moment and use the money to improve the lives of you and your family.

Visit my  Basic Financial Management page for help on how to best use your tax refund.