How To Reduce Your Taxes | Year-End Tips
December 23, 2014 : H&R Block
Ever wonder how it’s possible to reduce your taxes? While it’s not tax season yet, it’s the end of the year, so its the perfect time to make important financial moves that impact your upcoming taxes.
First, use H&R Block’s tax calculator to estimate what you may owe at tax time – or how much could be coming back to you in a refund. Jot that number down, so you can get a sense for the difference these moves make.
You may qualify for the Saver’s Credit for making eligible contributions to a retirement plan. The credit is worth up to $2,000 ($4,000 if married filing jointly), but will vary depending on your adjusted gross income (AGI). However, the credit phases out entirely for AGIs more than $60,000 for married filing jointly, $45,000 for Head of Household and $30,000 for all other filing statuses.
If you don’t qualify for the credit, you could still get a tax deduction. However, Roth IRA contributions are not deductible. More information on how much you could deduct can be found from the IRS.
So here’s what you should do now:
Open an IRA
To reap the benefits of a retirement account on your 2014 tax return you must already have an IRA or open one by the April 15, 2015 income tax filing deadline.
Contribute to an IRA
Once you have an IRA, you actually have until April 15, 2015 to contribute to it for the 2014 tax year. You can contribute $5,500 ($6,500 for over 50) or your taxable compensation for the year, whichever is smaller, to your IRA.
Make an extra employer-sponsored plan 401(k) contribution
This includes your 401(k), 403(b) or retirement plan that your employer also contributes to. The contribution limit is $17,500. If you haven’t met that number and are able make an additional contribution before the year-end, you can take advantage of saving the money without paying taxes on it.
You may deduct qualified medical expenses you paid in 2014 that exceed 10% of your adjusted gross income or 7.5% if either you or your spouse is 65 or older. This means you have to spend a considerable amount of money on medical care and products in order to qualify. One strategy is to group as many high-cost medical expenses in a single tax year. If it’s too late in 2014, you might consider holding off on medical expenses until 2015 to meet that 10% threshold. However, you can also put your credit cards to work for you. You can pre-pay for orthodontia or Lasik surgery so that it counts toward your 2014 expenses. By stocking up on contact lenses, a new pair of glasses, flu shots for the family and other expenses, you might be able to meet that 10% threshold without a problem.
In addition, there are other tax moves you should make as they relate to health care.
Max out HSA contributions
If you have an HSA (Health Savings Account), you can contribute $6,550 if your family is covered, or $3,300 for an individual. These are pre-tax dollars that will decrease your taxable income for the year. Plus, the funds in the HSA can be rolled over from year-to-year and can be used even if you leave your employer. You just have to be covered by a high-deductible insurance plan.
Spend down FSA
While most of your FSA (Flexible Savings Account) investment must be used within the year, many plans typically allow you to spend money from one year into March of the following year. In addition, you can also roll over $500 from your FSA into the next plan year. However, if you choose that option for a general medical FSA, you cannot open an HSA in the same year.
Pre-Pay College Tuition and Mortgages
Because of deductions associated with qualified tuition payments and home mortgages, it may be wise to make an extra payment in 2014. Again, you can make these early payments with a credit card at the end of 2014. Even if you don’t pay your credit card off until 2015, it still counts for 2014’s tax return.
Make a Charitable Contribution
If you are itemizing, making charitable contributions before the end of the year will increase the deduction you can take on your 2014 tax return.
Revise Your W-4
While you’re looking at your projected tax bill or refund, it’s also a good time to change the information on your W-4. If it looks like you will owe more than expected, you may want to claim fewer allowances. Alternatively, if you are already set to get a large refund, you might want to revoke that interest-free loan to Uncle Sam and increase your allowances to keep more in your regular paychecks.
Making these moves now will set you up for success at the tax desk and for all of the upcoming year. Hopefully this post clearly answered how to reduce your taxes at year-end.