Ways To Lower Your Income Taxes
If you’re like me, you are working hard on preparing your 2015 taxes. Either you’re doing your own taxes or maybe you are collecting the paperwork to present to your accountant. Federal income taxes are more complicated than ever. Michael Kitces, author of the Nerds Eye View Blog, has produced this chart showing various real marginal tax rates including all the various add-on taxes, such as the net investment tax, and the various phaseouts of exemptions and deductions.
So it’s complicated!
But there are some ways you might be able to lower your taxes. Some of them might have to wait for 2016, but there are some you can still execute now to save on your 2015 tax bill.
1. Contribute to an IRA
To lower your taxes, lower your income. Contributing to a tax-deductible traditional IRA is a wonderful way to lower your income. The deadline to contribute to an IRA for tax year 2015 is the tax filing deadline without extensions of April 18, 2016. The contribution limit is $5,500 plus an additional $1,000 catch-up if you are 50 or older. The contribution can only be made if you have “earned income”, that-is, income from a job or self-employment. Alimony received counts as earned income even if the spouse paying the alimony does not work. If neither you nor your spouse are covered by a retirement plan at work, then there is no income limit. If you are covered by a plan, then your deductible contribution starts to phase out at $61,000 for single and $98,000 for married filing jointly. But if only one spouse is covered by a plan, then the other spouse can make a contribution with an income phaseout starting at $183,000.
2. Start and Contribute to a qualified retirement plan for your business
If you own a business, even if that business is just consulting or driving for Uber, you can save a lot in current taxes by contributing to a qualified retirement plan for your business. If you already have a solo-401k for your business, you can still make an employer contribution for tax year 2015. The contribution can be 25% (20% for sole proprietorships) of net self-employment income. If you elected to make an employee deferral of a maximum of $18,000 (plus $6,000 catchup for age 50+) during 2015, you can actually pay it still in 2016. You have to have set up the plan prior to January 1, but you have until you file your taxes, either the normal tax filing deadline, or the extension deadline. This could be as early as March 15th or as late as October 15th, depending on the type of your business and whether you’re filing an extension.
You don’t already have a Solo-401k? No problem, just start a SEP-IRA. SEP-IRA contributions are considered profit sharing contributions. You can contribute up to 25% (20% for sole proprietorships) of net self-employment income. The deadlines are the same as for the solo-401k above, but you can actually start the plan when you make your first contribution. So you can still do it for 2015.
Both of these plans work great if you are the only employee, but depending on the number of hours worked an other factors, employees must also be covered. You should talk to your financial planning professional for more information.
3. Take Advantage of the Self-Employed Health Insurance Deduction
This is a great benefit for the self-employed taxpayer who is paying for his/her own health benefits. You can deduct your entire health insurance premium “above the line” up to the amount of self-employment income you have. The restriction is that the health insurance must be in the name of the self-employed person. So for instance, if it’s your business, but the health insurance is in your spouse’s name, you actually will be unable to claim this deduction. So you need to plan carefully. If you aren’t eligible for this deduction, but you do pay for your own health insurance with post-tax dollars, you can still deduct it on your itemized deductions, limited to the amount over 10% of your income (7.5% if you’re 65 or older).
4. Remember to Deduct Your Mileage
There are various mileage deductions which can help you. Of course if you have a business, your mileage is deductible at 57 1/2 cents per mile (54 cents in 2016) as an expense. But you can also deduct the mileage when you go to the doctor, dentist, or other health care professional at 23 cents per mile (19 cents in 2016) as an itemized deduction under medical deductions. You can deduct the same amounts for moving expenses if you had to move in 2015. If you volunteered for a charitable organization, you can deduct any mileage for your volunteering at 14 cents a mile. This is considered a charitable contribution. For all of these mileage deductions, you are supposed to keep track of your mileage, but if you didn’t do that at the time, don’t worry. Just figure out the dates you went and use Google Maps to find the mileage. Create a spreadsheet and you will have your log.
5. Get your Dependents Right
If you are paying more than 50% of someone’s upkeep and that person is disabled or makes less than $4000 per year (Social Security may or may not count), then you may be able to claim that person as a dependent on your tax return. That person does not have to live with you. So for instance, if your mother is in a nursing home and gets no income other than Social Security and you are paying more than 50% of the cost of the nursing home, then you can probably claim your mother as a dependent. The same is true if your adult child is living at home, but remember only if he or she makes less than $4000 per year.