Tax Breaks: Not Just for Tax Season
If you only think about taxes during the spring filing season, you’re missing out on valuable opportunities to save money all year long. Now that the 2017 deadline for filing your taxes has passed, you may want to start planning for the tax breaks that can pay off in the months ahead.
These are ten considerations for minimizing your tax burden throughout the year:
Keep more for yourself. Though a big tax refund can feel like a windfall, it means you’re having more than you actually owe deducted from your taxes. In other words, you’re giving the government an interest-free loan. Use an online withholding calculator to see how many more allowances you can take, and talk to your HR’s payroll office to file an updated W-4. If you’re like most people, you’re probably looking at a “raise” of about $225 per month.
Leverage your medical reimbursement account. If your employer offers this option (sometimes called a flex plan), you can channel part of your earnings to an account which you can draw from to pay medical bills. The benefit of this is you don’t have to pay income tax and Social Security tax on this money, and that can add up to 20% to 35% more, compared with spending money that’s been taxed.
Pay for child-care with pre-tax dollars. The strategy here is similar as the one just described with a health savings account. If your employer offers a child-care reimbursement account, you can save one-third or more of the cost of childcare by paying for it in pre-tax dollars (more here).
Take advantage of employer-provided tax-free educational support. It is not uncommon for larger companies to offer employees up to $5,250 of tax-free educational support. The way it works is that the business pays the bills for the education or training you choose to pursue, but the cost isn’t included in your salary and doesn’t appear on your W-2. You can pursue any kind of accredited education or training regardless of whether it relates to your job.
Go green. Installing forms of alternative energy in your home qualifies you for a tax credit of 30 percent of whatever you spend (including labor costs) on solar hot water heaters, wind turbines, geothermal heat pumps. These tax credits apply to both residential and commercial systems (which might be great news to you if you’re a business owner with your own building), and there’s no cap on its value. These are not the only tax breaks provided for going green, check out these five popular tax credits for going green.
Use a vacation home as a tax shelter. When buying a second home, the IRS is on your side since you can deduct the mortgage interest on the loan just as you can on the loan for your primary residence. Interest on up to $750k of first- and second-home debt can be deducted, as can property taxes.
Become a landlord. Though you may never have considered it, if you live in a “hot spot” that regularly attracts high numbers of visitors or tourists, temporarily renting your place can make you a hefty chunk of change – tax free. A provision in the tax code lets you rent your house out for up to 14 days per year without having to report a penny of the income you earn from it.
Track and document the cost of medically necessary improvements. If you need to add a wheelchair ramp or a walk-in bathtub to your home, hand controls in your car, or need to make any modifications to property to accommodate for medical needs, you can include this amount in your deductible medical expenses (so long as they don’t exceed added value to your property).
Put your kids to work. As long as your business isn’t incorporated, there’s multiple tax advantages to hiring your kids. Not only can you deduct what you pay them (which allows you to shift income from your presumably higher tax bracket to their lower tax bracket). Wages are earned income, so “kiddie tax” isn’t accrued, and if your child isn’t yet 18, they don’t pay Social Security tax on the earnings.
Be strategic about income earned from “hobbies.” The IRS will ding you if it deems your activity (for example, sailing, vintage car restoration, or bee keeping) to be a hobby rather than a for-profit business. Either way, you have to report any earnings from these activities as income, but with a hobby, there are restrictions on deducting expenses and you can’t deduct a loss. To avoid the hobby-loss rules, engage your hobby as you would a business by having a separate bank account for earnings associated with it, a web presence, and business cards.
E-File.com provides free online federal tax filing for 1040ez tax returns and nominal-fee state tax filing and can help you make the most of qualifying tax breaks all year long. Read more about our services here.