Summer fun should not include worrying about taxes. But while the paperwork due on April 15th is probably at the bottom of your to-do list this summer, there are things you can do to reduce your taxes right now.
With so much emphasis put on paying taxes on April 15th, people often overlook the fact that taxable events occur throughout the year. To make that mid-April payment a little less daunting, start taking advantage of these tax-saving tips.
1. Prefer to defer
The government loves to create incentives to help people save for their retirement. It may be rather self-serving-the less you rely on Social Security, the less heat you'll put on legislators to save it-but the benefits exist nevertheless.
There have been a number of recent increases in retirement plan contribution limits. Defined contribution plans and IRA contributions both experienced a $1,000 increase in the maximum amount you can contribute. The former jumped from $45,000 to $46,000 while the latter rose from $4,000 to $5,000. Contribution levels have also increased for people 50 and older in retirement plans like IRAs, 401(k)s, 403(b)s, Section 457s, and SIMPLEs. Check with your accountant or financial planner for specific amounts.
2. Save when you lose
If you experienced some significant losses in the stock market, they actually can save you some money. The tax code allows you to deduct some of those losses, creating a nice way to offset any significant taxable gains.
Consult closely with your accountant on this deduction, because there are a number of limitations. If you claim a deduction from an investment loss, for example, and then buy a virtually identical security within 30 days after you've sold the investment, the IRS will penalize you.
3. Get an education, catch a break
Just as he promotes retirement savings, Uncle Sam also gears his tax code to help out those who pursue higher learning-particularly those with lower incomes.
A college tuition deduction of up to $4,000 is available for single people earning less than $65,000 a year, or joint filers making less than $130,000. The deduction can be used for yourself or a dependent. There are also tax credits (Hope of Lifetime Learning) that can be applied to your taxes.
A number of long-standing tax-friendly savings tools also exist. Many 529 college saving plan contributions, for example, can be deducted from state income taxes. Recent changes to the tax code now make distributions from the 529 accounts-previously taxed at a child's income rate-tax-free. The Education IRA, also known as the Coverdell Education Account, allows for tax-free withdrawals.
The lazy days of summer tend to be filled with swimming pools and sunshine, not tax savings discussions. However, a visit to your accountant for some mid-year tax planning could wind up saving you hundreds, if not thousands, on your taxes. Take some time and plan ahead. A little extra effort this summer could take some heat off you when April 15th rolls around.