Let me start off by saying I hate taxes. Not in a conservative “the government should stay out of my pocket” sort of way. It’s more of a procrastination sort of way. Every year when tax season comes around I always feel bothered to get all my documentation together and make time to go see a tax professional.
Like so many things in life I just get taxes over with and it’s done for the year. By the way I don’t recommend doing your taxes yourself for a couple of reasons. First, you might do them wrong. Second, if you just do the simple tax return you could be leaving behind a lot of money that a tax professional would see by taking one look at your financial year. Turbo tax and the online tutorials are great but if you want the most money it makes mathematical sense to pay a little extra to get extra back.
Because I hate doing my taxes I really have had about zero interest in learning about how taxes work. You may have heard by now that U.S. tax regulations are so complicated that often the professionals don’t know how they work. I believe the system is designed to confuse and frustrate people so that they just rush through it not looking into extra money they could be getting back. Like any sane human being, I do not feel like spending my free afternoons reading through tax rules. I have a life. Lately though I have slowly started to pay attention to what’s going on. This year I kept my ears open and I caught a few bits of good advice.
You Can Write Off Education Expenses
Education costs are a topic that’s near and dear to my heart. About six years ago I got myself into student debt and it was one of the motivating factors that helped me change my financial life. Until this year I didn’t know that you could write off what you spend on tuition. Not only can you write off tuition expenses but you can write off all kinds of education expenses such as books, supplies, and even something like a college parking pass. Write offs don’t necessarily mean that you get all the money back that you paid but it reduces your taxable income.
For example, if my taxable income was $20,000 for the year and I spent $3,000 on tuition and college expenses my new taxable income will be $17,000. The government will tax me on 15% of $17,000 instead of 15% on $20,000. There are limits on education deductions, capped at $4,000 for 2015.
Better yet, let me remind you that if you have a federal college loan the interest you pay is tax deductible. So even if you’re not in perfect financial shape and you’ve had to take out loans, that interest you’re paying every month (up to $2,500 for 2015) is tax deductible. Like most parts of our enigmatic tax code, there are lots of little exceptions and special cases when it comes to education write-offs. Unfortunately if your income is high, above $80,000, you don’t qualify for the loan interest write-off. This tax write off does not apply to private student loans. I advise you to never take out a private student loan if you can help it. The bank might have you by the balls financially and you don’t have another way of getting money but please, think twice. There are colleges in Germany, France, Norway and others where you can go to college for free or next to free. I’d do that before ever taking out a private student loan.
Contribute to Retirement Accounts to Reduce Your Taxes
The main account we’re talking about here is a traditional IRA. Unlike a Roth IRA, traditional IRAs are contributed to with pre-tax money and anyone no matter their income level can own one. If you contribute to a traditional IRA during the year you can deduct that amount on your taxes. The same goes for an SEP or Simplified Employee Pension IRA which you might have if you’re self-employed or you work for a small company. However, if you also contribute to a 401k or 403b through your job you could be disqualified from this tax write off. It all depends on your Modified Adjusted Gross Income (MAGI). If your total yearly income plus whatever amount you put into a 401k/403b is above $61,000 for single filers and $98,000 for joint filers you’ll only get a partial deduction.
Another account that can qualify you for a deduction is your HSA or Health Savings Account. If you don’t know what an HSA is you can check out my previous post. This type of account is designed to tax shelter money put away for qualifying health expenses and although it’s not a retirement account, you’ll hear lots of advisors and financial bloggers talk about them like they are. Contributions to an HSA aren’t necessarily a deduction but if you contribute to one it’s one way you can protect some of your money, $3,350 for single and $6,650 for family, from being taxable. When health expenses like doctor copays or prescriptions come up, you can use that tax free money to pay for them.
You Can Write Off Business Expenses
This one is a little less common because for most people if they have to travel for work the company will usually pay all the expenses. If there is any expense your company doesn’t pay you for on business trips you can write those off. Qualifying expenses might be mileage, parking fees, food expenses, or car rental fees. I’d hope for all of you the company is at least paying for your hotel and flight ticket but if they don’t you can write those off too. And you should probably think about switching jobs.
Another work-related tax deduction has to do with owning your own business. I think most people who are self-employed as their main source of income know this but if you have any sort of overhead for running your business you can write off the money you’ve spent. A couple years ago I ran an ebay business and I made enough money at it that I had to claim it on my tax return. My tax professional told me not only could I write off all the supplies I had to buy like shipping envelopes but even the mileage driving back and forth to the post office. If there’s a business expense you have that you think can be written off it most likely can be.
The Earned Income Tax Credit
This tax credit is one of the biggest opportunities to get money back for low to middle income households. The big qualifier for this one is going to be whether or not you have kids. If you don’t have kids you can still claim this credit if you meet the income requirements but you’ll get back a lot less, a maximum of $503. With children your maximum credit goes up the more kids you have. If you have three or more “qualifying children” your maximum credit for the 2015 tax year is $6,242. So there’s at least one benefit to having several screaming bundles of joy running around. Here’s a simple tool you can use to find out if you qualify for EITC.The earned Income Tax Credit is a lot different than some of the other topics in this blog post because It’s really more like a boost for low income people rather than a true “tax strategy.” It isn’t hard to claim as long as you don’t make too much money and It’s a great option that a lot of Americans aren’t taking advantage of.