When people ask me, “Why do I have to spend money to save money on my taxes?” I immediately respond, “Who told you that?!?” The concept that tax perks only come from spending money or having some kind of expense is the biggest tax myth ever! This simply isn’t true. Our wonderful legislative team (Congress) has come up with a barrage of tax perks that are directly tied to you saving your money.
Yes, that’s right. I said it. You get your tax perks and keep your money too!
And contrary to popular belief, these perks are not just for the wealthy either. As a matter of fact, a great majority of these benefits are targeted at the working class. These laws were created specifically to encourage saving and wealth creation.
Here are some perks that will give you a higher tax return this year:
- 401k/IRA contribution – In 2016, you can contribute $18,000 to your company-sponsored 401k/403b/457 plan (plus an additional $6,000 for those 50 and older) and up to $5,500 to both Traditional and Roth IRAs (plus an additions $1,000 for those 50 and older). While there are guidelines, restrictions, limitations (Red tape) to determine exactly what this would mean by way of what you can contribute and how much tax savings it would bring, both investment vehicles legally and legitimately reduce your taxable income, ultimately reducing your tax bill at filing time.
- Retirement savings credit – As an added bonus to lower wage earners, you may also receive a tax credit up to 20 percent of contributions to these plans, only if you hadn’t made in withdrawals in the last five years. Tax credits are dollar-for-dollar reductions of your tax liability. It’s like the IRS gave you a coupon on your taxes!
- Investment interest expense – Stock market and mutual funds more your speed? No problem. You may be eligible to deduct the investment fees you paid if these amounts meet certain thresholds. However, expenses can only be deducted in the year they were paid. They do not carry over to other tax years. This could still add up to some pretty sizable deductions and tax savings. Remember, every deduction counts.
- College savings plan – While there currently aren’t any tax perks on making contributions to a college savings plan, the earnings on contributions made to a qualified 529 plan aren’t taxed. Also, distributions from the plan are tax-free if they are used towards qualified higher education. On a related note, you could still qualify for the American Opportunity Tax Act Education Credits for yourself or a qualified dependent.
- MSA/HSA Accounts – Your health is important and the tax code believes so too. You can lower your taxable income by as much as $6,550 annually by contributing to a MSA/HSA, along with being enrolled in a High Deductible Health Plan. Think that’s great? It gets even better: withdrawals from these accounts are tax-free when used for eligible medical expenses.
By now, you’re in one of two places: head exploding from information overload or excited to learn more. In either case, this is exactly why hiring a qualified tax expert is what you need to do immediately. Don’t know any experts? Ask Ms. Tax!