CHICAGO — The filing deadline for 2016 federal income taxes is rapidly approaching, but you still have time to make sure you’ve done everything you can to keep Uncle Sam’s paws off as much of your money as possible.
Earning money in a small business is tough enough these days, and keeping it is even harder. Here are some last-minute ways to do that by reducing your 2016 income tax bill:
SAVE MORE FOR RETIREMENT
One of the most important tax-savings steps you can take is contributing the maximum to your 401(k) or other tax-deferred retirement plan. If you haven’t done so, max out your retirement savings now by bringing your contribution up to the legal limit. For 2016, you may put as much as $18,000 into a 401(k), 403(b) or 457 plan. If you’re over age 50, you may add an additional catch-up contribution of $6,000.
Every dollar you contribute means you will pay less income tax. Except for the new Roth IRA, all contributions to tax-deferred retirement plans are tax-deductible in the tax year for which you make your contribution.
If you’re in the 28% tax bracket, for every $100 you contribute, your federal tax bill decreases by $28. Your total savings will actually be higher when you factor in savings on state taxes. Obviously, the higher your tax bracket, the higher your savings.
This is “found” money. Whatever you do, don’t walk away from it. Of course, many people are not in a position to contribute the legal maximum. If you can’t come up with the maximum, bump up your contribution as much as you possibly can. It may seem painful now, but you’ll benefit greatly in the future.
Remember, you must make your contributions no later than the time you file your 2016 return.
DON’T FORGET SALES TAXES
Do you still have records of large purchases made in 2016? You still have a choice of deducting either your state and local income taxes or state and local sales taxes, but not both.
If you live in a high-tax state such as Ohio or Massachusetts, you’re probably better off continuing to take the deduction for state income and property taxes. However, for residents of states like Florida and Texas, which have no separate income tax, the sales tax deduction can significantly reduce federal taxable income.
Can’t find your sales receipts? Not to worry: the Internal Revenue Service has developed tables that allow you to estimate, based on your gross income, how much state sales tax you probably paid. Visit www.irs.gov and type “estimated state sales tax” in the search box to find the tables.
HAVE KIDS IN COLLEGE?
If you’re dishing out big bucks for college tuition, you might be able to get some of them back. There are two education credits and a tuition deduction for which you may be eligible.
A credit reduces the taxes you owe dollar for dollar. A deduction reduces the taxes you owe by a percentage of every dollar you deduct. For example, a $100 credit reduces your taxes by $100. A $100 deduction reduces your taxes by $100 times your tax bracket. If you’re in the 28% bracket, your $100 deduction will reduce what you owe by $28.
The Hope Scholarship Credit is for taxpayers whose children (or themselves) are in their freshman or sophomore years in college. It offers a maximum tax credit of up to $2,500 for 2016. The Lifetime Learning Credit offers a maximum tax credit of up to $2,000 per year to pay for qualified tuition and enrollment fees.
If your income is too high to qualify for either the Hope or Lifetime credits, you may be eligible to take a tuition deduction.
And don’t forget the Child Tax Credit, which allows you to claim a maximum $1,000 per qualified child. Remember, a tax credit is a direct subtraction from your actual taxes owed, which is much more valuable than a deduction.
Details and earnings limitations on education deductions and credits are complex, so it’s best to check with your tax adviser to see if you are eligible.
Check back Tuesday for the conclusion!
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an attorney or tax adviser for advice regarding your particular situation.