2016 is almost here, which means we’re coming to the end of another tax year. Learning how to wisely limit tax liability is one of the keys to keeping your wealth. Here are some tips on how to maximize your tax return and limit your tax liability before Dec. 31 rolls around.
Know Your Tax Bracket
The first step in maximizing your tax return begins with knowing your tax bracket. If you’re not sure, the IRS reports the 2015 tax brackets for single and joint households. By knowing how much income you are expected to make in 2015, you can better determine how many and what types of tax-limiting moves you need to make before the end of the year.
Understand Tax-Reducing Terms
It’s important to understand the basic meaning of the tax deduction terms. Different terms have different effects on the amount of money you’ll owe (or be owed) at the end of the year. For instance, a tax deduction, like a charitable gift, takes money off your taxable income. On the other hand, a tax credit, like the American Opportunity Tax Credit for college tuition, lowers your taxes due dollar for dollar. By understanding the terms and what they mean, you can choose the method of tax reduction that best suits your situation.
Know What Deductions Are Available
There are several deductions and credits available to taxpayers depending on their family and income situations. Here are a few basic ones that could help you maximize your tax return this year.
1. Charitable Giving
If you’re looking to minimize what you pay to Uncle Sam and increase your tax refund amount, make an end-of-the-year charitable gift to a qualified nonprofit of your choice. Depending on your income situation, you may be able to deduct charitable gifts of up to as much as 50 percent of your adjusted gross income. And you don’t have to just give money. Read “5 Items to Donate for a Charitable Tax Deduction” for ideas.
2. Retirement Savings
Maxing out your 401(k) or 403(b) contributions and taking advantage of traditional or Roth IRA contributions will not only help prepare you for retirement, but it will minimize your tax liability as well. For 2015, you can contribute as much as $5,500 to an IRA, or $6,500 if you’re age 50 or over. For more information on IRA contributions and contribution limits, check out these “5 Year-End Retirement Planning Tips.”
3. Education Contributions
You can shave tens of thousands of dollars off your taxable income by setting up one or more 529 college savings plans for your children, a relative or even a friend. With a contribution limit of $14,000 per year, a college contribution fund (or funds) can be a terrific way to lower tax liability and increase your tax refund potential.
4. Flexible Spending Account
Take advantage of an FSA and the payroll deduction percentage for your last paycheck or two of the year to lower your taxable income for 2015. The key to tax deduction success where FSA contributions are concerned is to not put more in your FSA than you spend on medical costs during the year. The reason is that FSA funds for a current tax year cannot be rolled over to use for the following year’s medical costs. In other words, with FSA funds, it’s “use it or lose it.” This move may not add up to much to lower your taxable income, depending on your situation, but every little bit helps when it comes to maximizing your tax return.
With a little education and some creative planning, you can maximize what you get back from Uncle Sam at the end of the year and avoid paying taxes on money that can be put to better use to prepare for the financial future of yourself and your family.
More from U.S. News
10 Money Action Steps to Take Before 2016
8 Ways You Can Prepare Now for Next Year’s Taxes
7 Most-Missed Tax Deductions and Credits
How to Maximize Your Tax Return By the End of the Year originally appeared on usnews.com
