Lower Your Tax Burden by Maximizing Your 2016 Deductions

With 2017 right around the corner, now is a good time to review all the ways you can reduce your taxes for this year.

Boosting your deductions can either increase your refund or decrease the amount of tax you have to pay the IRS. Either way, it’s a win-win situation for you.

Take Credit Where You Can Get it

Tax credits are an effective way to reduce your taxes. Each credit you receive means one less dollar you have to pay in taxes. The IRS provides over a dozen credits in a number of categories, including:

Higher Education

There are two credits you can take advantage of for education. You can receive credit up to $2,500 for each eligible student in a post-secondary institution with the American Opportunity Tax Credit (AOTC). The Lifetime Learning Credit (LLC) offers up to $2,000 per year for post-secondary education, as well as training to improve job skills. The AOTC can only be applied for four years per eligible student, whereas the LLC can be used anytime there is a qualifying event.

Child and Dependent Care Credit

This credit allows working individuals and spouses, or those looking for work, to apply the credit for child care by someone other than a spouse or dependent, and for the care of a spouse or dependent who is unable to care for themselves. Maximum credits are $3,000 to care for an individual, or $6,000 to care for two or more dependents.

Earned Income Tax Credit

This credit applies to low- and mid-level income households, but it’s worth mentioning because 20 percent of people who are eligible don’t take advantage of it. The moral: Don’t let credits slip by. Take advantage of every one you’re eligible for.

Most of the credits have varying income levels to qualify, so check with your tax preparer or the IRS for eligible income amounts.

Take Advantage of Deductions

A good place to start for your deductions is to decide whether it would be more advantageous for you to itemize deductions, or take the standard tax deduction. Of course, you always want to choose the greater amount, but it’s not always easy determining deduction amounts. You have to be committed and organized to itemize your deductions by keeping track of receipts, business-related mileage, property taxes, and charitable donations, just to name a few. The standard deduction is much easier to calculate since you only have to plug in information on age, income, and filing status.

If you’re ready to jettison some underperforming stock, you can use those losses to offset any capital gains taxes you might have to pay. Don’t forget, long-term investments you’ve held over a year are taxed at a lower rate than short-term investments you’ve held less than a year, which are taxed at your regular tax rate. So, it might make sense to hold on to the stock you bought 11 months ago for just a few more months to get the lower tax rate if you plan to sell it.

To Give or Receive

Keep in mind, a big refund from the IRS means you gave the government an interest-free loan during the year. It’s important to re-visit your withholding on your W-4. Should you receive or pay a large amount of taxes in a year, consider adjusting your allowances and withholding accordingly, especially if you’ve had a significant change in your life, like a new job or the birth of a child.

Just as you likely retain both a legal and a wealth advisor, you may wish to align in similar fashion with a tax advisor. Because after all, it’s not what you earn that matters, but what you keep.