Happy holidays everyone! As we near the end of the calendar year, I'm sure there are more important matters on your mind other than tax planning. But as you relax in the company of family and friends, consider taking 30 minutes out of your day to take a look at your finances with a focus on reducing the share that goes to Uncle Sam. Let's go over some last-minute tax moves that can help you keep your hard-earned money right where it belong - with you.
1. Estimate your tax liability
Take a look at that last paycheck stub with attention to the YTD (Year-to-Date) column. For most, your W-2/1099 income will make up the majority of your annual taxable income. If you have other forms of income that is substantial (e.g. large stock sale), gather those records as well. Once you have the numbers, head over to an online tax estimator and get an idea of how much your tax liability is - here is one provided by Turbotax.
2. take some last minute deductions
Deductions are qualified expenses that can be used to reduce the amount of your taxable income. For example, if you made $100,000 in taxable income and spent $10,000 on a qualifying expense, your final taxable income in the eyes of the IRS would be $100,000 - $10,000 = $90,000. Khan Academy does a much better job of reviewing this topic here if you need a refresher. You can claim your deduction in 2 ways - standard deduction or itemized deduction (Should I Itemize?). But regardless of whether you take the standard deduction or itemize your deductions, here are some additional "adjustments" you can maximize - also known as "adjustments to income" or "above-the-line deductions".
- Contributions to Traditional IRAs - limit of $5,500 or $6,500 if you're over 50.
- Contributions to Health Savings Accounts (HSA) - limit of $3,350 single or $6,650 family.
- Contributions to 401(k)/403(b) plans - limit of $18,000 or $24,000 if you're over 50. Note that this isn't technically an "adjustment" since it's not reported as income in the first place, but it acts like one.
- Moving expenses - no limit but the move must meet certain criteria.
- Student loan interest - limit of $2,500.
The list is longer, but the above are most likely to benefit readers of White Coat Money. Each has its limits, so make sure you maximize them all!
3. Watch your flexible spending accounts (FSA)
If you have a Flexible Spending Account (FSA), make sure to check your balance. If you have a lot of money left, check to see if your employer has adopted the grace period that allows you to carry over up to $500 until 3/15/2016. If not, make some plans for last minute visits to the doctor, dentist, or the drug stores to use up the money in your account.