Yahoo Finance 6 Ways to Lower Your Taxable Income
As Americans punch their information into tax software and schedule appointments with their accountants, it's only natural that dollar signs are on everyone's minds this time of year.
The IRS has already given out $125 billion in tax refunds as of Feb. 20, with an average refund of $3,120. Whether you expect a big refund from Uncle Sam or are trying to minimize what you owe the IRS, there's always room for improvement.
Here are a few moves you can make to lower your taxable income (without fudging your 1040).
1. Contribute to a health savings account.
Through April 15, 2015, you can contribute to an HSA to lower your taxable income for 2014. This is an especially wise move if your health insurance plan is costing you a lot in deductibles. HSAs allow depositors to store funds for designated medical costs, which grow tax-deferred until withdrawal, and the contributions are tax deductible. Those who make this tax move will have to fill out Form 8889 to document their contributions to the IRS.
2. Deduct your home office and business miles.
Working from home really can pay off: You can claim your home office expenses if the space is used to meet with vendors, clients or customers, and you don't have an office with your employer. Your home office must exist in a designated area and be used exclusively for work purposes on an ongoing basis. Combined with job-related travel expenses -- for instance, if you often drive several hundred miles to be at headquarters for the day -- you can greatly lower your tax burden.
Those deducting mileage for business purposes, when an employer isn't compensating the commute, can deduct 57.5 cents per mile when filing this year through the standard mileage rate. The option to deduct additional expenses, such as repairs, maintenance, insurance and depreciation of the vehicle, is also possible using Form 2106.
3. Max out an IRA.
If you've been slacking on saving for your future, cut your taxable income while saving for your retirement by upping your contributions to an IRA. If your employer doesn't offer a 401(k), or even if you lack a job completely, you can still contribute to a traditional IRA to grow your retirement nest egg tax-deferred until you withdraw the funds.
Because anyone can invest in an IRA, up to $5,500 (or $6,500 for those ages 50 and up), this can be a strategy for parents, or children, to reduce their tax burdens by funding a family member's IRA. Contributions can be made until the tax-filing deadline on April 15 to receive a deduction for your deposited funds.
4. Opt for a 401(k).
If your employer does sponsor a retirement plan, like a 401(k), you can take advantage of this benefit to further lower your taxable income by Tax Day. Like IRAs, a traditional 401(k) will allow you to stash funds for tax-deferred earnings, while a Roth 401(k) will require you to pay taxes upfront for tax-free withdrawals upon reaching age 59 1/2. Plus, if your employer offers to match your contributions, you're essentially leaving money on the table by not opting into this benefit.
As an added bonus, because 401(k) plans use pretax dollars, they're not represented as income for your federal taxes, ensuring you save on your annual tax bill. Not to mention, your 401(k) could make you eligible for the retirement savers credit, which is worth up to $1,000 for individuals and $2,000 for couples.
5. Have your employer invest in your education.
Have you considered going back to school to get a higher degree, certificate or just expand your skill set? Get motivated to sign up for a class or two at your employer's expense. Companies can offer $5,250 to employees annually in tax-free education assistance; having your employer invest in your education instead of your salary will lower your take-home income and maybe keep you in a friendlier tax bracket. Savings will apply next tax-filing season for your enrollment in courses this year.
6. Negotiate a raise instead of taking a bonus.
Different tax rates apply to bonuses because they're considered supplemental income. Bonuses are either taxed at a flat 25 percent rate or are added to a worker's regular paycheck, increasing the worker's overall tax burden -- potentially to over 25 percent. If your employer uses the latter method, known as the aggregate method, consider asking for a raise instead of a bonus to reduce your tax liability for your hard work.
Christina Lavingia is an assistant editor and writer for GOBankingRates.com, a source for the best deposit and loan products, personal finance news and more.
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