Now that the “most wonderful time of the year” is behind us, it’s time for the most dreaded time of the year: tax season. But if you take advantage of these tax breaks you can make this time of a year a lot more jolly.
We can all agree that no one likes paying taxes. As a financial professional I spend time talking about taxes with a lot of people and nearly everyone agrees that they don’t like paying taxes. I did run into one person that said she did not mind paying taxes and, frankly, I had no comment for that. I don’t know where to go when someone says they don’t mind taxes.
For most of us though, taxes are not something we enjoy. But they are necessary. Since we have to pay taxes we should at least know about the different tax breaks we can take advantage of to help reduce our tax burden. Let me share 5 valuable tax breaks with you.
Tax Break #1: The retirement account deduction.
This is one tax break in which everyone can participate. Contributing to a retirement account is an essential part of a good retirement plan. But it’s also a way to reduce taxes each year and see some real savings at tax time. If you have a 401(k) through your employer you can elect to contribute a percentage of your pay, and might even get a matching contribution from your employer. If your employer has no retirement plan, don’t worry, open an IRA for yourself and begin contributing. You get the same benefits as an employer plan but with more flexibility in your investing and withdrawal options.
Tax Break #2: The Child Tax Credit (CTC).
Raising a child costs money. Thankfully Uncle Sam is still willing to help parents out with ah tax break to help with that cost. The Child Tax Credit allows you to take a $1000 credit for each qualifying child in your home. A recent article shares information on the qualifications:
“You must have claimed the child as a dependent, the child can’t have provided half or more of his or her own financial support, the child must be a U.S. citizen, the child must have lived with you for at least half the tax year, and your MAGI must be not be more than $75,000 for an unmarried filer, $110,000 for someone married and filing jointly, and $55,000 for someone married and filing as a single filer.”
Remember, a tax credit is better than a deduction because it gives you a dollar-for-dollar reduction in your taxes. So this is one tax break you don’t want to miss out on. If you have 3 kids, you will receive a $3000 dollar credit on your taxes.
Tax Break #3: The Earned Income Tax Credit (EITC).
This is yet another great tax credit you don’t want to miss out on. If you do your own taxes you might miss this valuable credit. A qualified tax professional will know to ask and seek to apply this tax credit. This credit is based on your income level and how many kids you have, and since there are income limits you may want to use this IRS chart to see if you qualify. But, if you do qualify this tax credit could be worth over $6ooo to you and your family!
Tax Break #4: The State 529 Education Contribution Deduction.
Did you know you could get a tax break just for putting money into college savings plan? Your state 529-college education plan is a place where you can save for college for any child. But your state wants you to use their 529 plan instead of using a plan from another state. To incentivize you to use their plan, your state will give you a nice tax deduction on the money you contribute to the plan. This is a great way to save for college while reducing your tax liability each year that you contribute to the plan. It’s a win-win.
A recent article says:
“529 plans provide no upfront federal tax benefits. However, the tax-deferred nature of the funds within a 529, along with the fact that a number of states do offer tax deductions, could make them worthwhile for parents. Today, nearly two-thirds of all states offer a tax deduction for contributing to a 529. Find out if your state is one.”
Tax Break #5: The Self-Employed Health Insurance Deduction.
America has many self-employed small business owners. If you are one of those self-employed business owners you are probably paying for you and your family’s health care premiums out of your own pocket. You may be able to deduct the cost of premiums, including dental and long-term care premiums from your taxes. This is one way self-employed people can reduce their tax burden and help their business.
Listen, taxes aren’t our favorite topic. But tax breaks are fun to talk about. Don’t miss out on these and other great tax breaks that could save you hundreds or even thousands of dollars each year. And don’t let tax misunderstandings stop you from getting the most from your tax return.
Remember to include your financial adviser in discussions to learn how he or she can help reduce your tax burden. With a little patience and a good tax professional you could enjoy lower taxes and better returns.