Ah, April. The smack of baseballs hitting the catcher’s mitt. Bright flowers blooming. That first lukewarm day when women walk down the street with practically nothing on.
Uncle Sam sucking your checking account dry on tax day.
I know, I know: We all want to live in a country with an army, paved roads, and clean water. But you don’t have to be a placard-waving Tea Party activist or Wesley Snipes to wish you could reduce the size of the check you send to the IRS in a few weeks. And good news: Though most tax-saving moves have to be made long before tax day, there are still a few financial maneuvers you can execute at the last minute to reduce your 2015 liability.
Even more good news: Congress even passed a few tax breaks last year that will help you, and this year’s tax-filing deadline is later than usual, on April 18 (pushed back because April 15 is a holiday, Emancipation Day), so you’ve got even more time than usual to try and shave a few Benjamins off what you owe. Here’s how.
MANEUVER 1: Open up a last-minute IRA
You’re probably sick of hearing that you aren’t saving enough for retirement. While that’s probably the case, I’ll spare you the same old lecture and offer you yet another reason to start saving: Uncle Sam will cut your taxes when you put money into an Individual Retirement Account. The IRS allows you to contribute up to $5,500 per year ($6,500 if you are over 50), and you can then reduce your taxable income by that amount. To oversimplify a bit, if you earn $100,000 a year and deposit $5,000, the government will tax only $95,000 of your income. That could knock about $1,250 off your tax bill.
Low-income savers get an added bonus: If you’re single and made less than $30,501, you’re eligible for the “saver’s credit” of up to $1,000 in addition to the tax break. “It allows you to double-dip,” says Lisa Greene-Lewis, CPA and tax expert at TurboTax, who says only one out of four people who are eligible actually claim this credit. To get the tax savings on your current return, make sure you tell the IRA administrator (Fidelity, Schwab, or whichever firm the account is with) that the contribution is for the 2015 tax year. Then deposit the money by April 18.
MANEUVER 2: Sock away some dough in a Health Savings Account
If your health-insurance plan has an annual deductible of more than $1,300 ($2,600 for family coverage), you can pair it with a Health Savings Account. This is like an IRA but for doctors’ bills, except you don’t have to wait for retirement to spend it. You can deposit up to $3,350 for an individual ($6,750 for a family) and deduct that amount from your taxable income. You can withdraw the money at any time to pay for medical expenses. Unlike flex-spending accounts you may have through your employer, these are not “use it or lose it” accounts. You can even invest the money, let it grow, and tap the account years from now. Note: Make the deposit in the HSA by April 18 in order to reduce your 2015 tax bill.
MANEUVER 3: Procrastinate—and then deduct like hell
If you can’t get all your records together and file your taxes or your accountant doesn’t want to hear from you this late in the game, it’s easy to get an automatic six-month extension. The bad news is, this is a paperwork extension, not a payment extension. You still have to send the IRS any money owed by April 18, so make your best guess and send in a check with Form 4868. If in doubt, overpay and file the actual return as soon as you can to get any money back that you are owed. You’ll have until Oct. 15. As you pull your records together, your goal is to find things you spent money on last year that the government allows you to deduct from your income, thus reducing your taxes. Here are seven easy deductions:
1) Charitable contributions: Any cash or donation of goods to a charity, even clothes dropped off at a qualifying thrift shop, can reduce your taxes. Bill Clinton famously claimed $2 a pair for donated underwear. Just remember you can deduct only the fair-market value, which means what someone would actually pay for your boxers. You can also deduct 14 cents a mile spent driving to and from charity work. Greene-Lewis says taxpayers sometimes forget about automatic charitable deductions from their paychecks since they don’t show up on the W-2 form from their employer.
2) Mortgage-interest deduction: To the annoyance of renters (and economists who say it’s distortionary), interest on the mortgage from your primary residence is deductible. It can be a huge savings. In round numbers: In the first year of a $200,000 mortgage, you would pay nearly $8,000 in interest, which could mean a $2,000 tax break for someone with a $100,000 income.
3) Business expenses: Self-employment can be tough on the tax front, with no employer to share your Social Security (FICA) taxes and none of that free money in the form of a 401(k) match. But don’t forget that “ordinary and necessary” business expenses are deductible against any profits, from the expense of hiring a website designer to buying a lawn mower for your landscaping operation.
4) Deadbeat friends: The worst thing about Ted Cruz’s plan to abolish the IRS is that this deduction would go away. If your unemployed buddy’s request to crash on your couch “just for a week or two” turned into a year, you may have a sweet tax break raiding your fridge. Greene-Lewis says that if the deadbeat made less than $4,000 and you covered more than half of his living expenses, congratulations! You have yourself a “dependent,” good for a tax break of up to $4,000.
5) Sales taxes: Just before Christmas, Congress wrapped up a gift to residents of states with low or no income tax.
Lawmakers made permanent a tax break that allows you to deduct any sales taxes you paid throughout the year instead of deducting state taxes (but not both). If you didn’t keep all your receipts, don’t worry. You can simply take a standard deduction based on your income and place of residence. You can add certain big-ticket items on top of that, so, for instance, a New York City resident buying a $50,000 car would pay $4,375 in sales tax. On top of that you get a standard deduction of $1,232, for a total deduction of $5,607.
6) Student-loan interest: Any interest you paid on student loans is deductible up to $2,500. Note that the principal is not deductible; your lender will break it out for you.
7) The nice-guy deduction: Finally, there is always the “standard deduction,” which means that the IRS lets you subtract $6,300 from your taxable income just ’cause you’re a nice guy—or you can “itemize,” which means listing all the expenses you incurred that the government lets you deduct from your income. If you’re not sure, just add up your deductions and take whichever is higher.
MANEUVER 4: If for nothing else, start prepping ahead of time for next year
If you’ve realized nothing else by this point, it’s that taxes are complicated and record keeping is crucial. So even if it’s too late to itemize for 2015, start keeping records now so you can itemize next year.
“The simplest tax mistake is not taking the deductions to which you’re entitled,” says Gary Schatsky, a financial adviser and CPA at objectiveadvice.com. “Merely remembering deductions and taking them may be the easiest paycheck you ever earn.”
Remember that you have to have records to back up your deductions if you itemize. Since the tax code is 70,000 pages long, the above list isn’t exactly comprehensive. Unless you have a very simple financial life, I recommend hiring an accountant or using tax software; there’s a good chance the help will pay for itself, and more, in tax savings.