Taxes can be a real pain in the you-know-what, both planning for them and paying them. After you’ve earned your money, you have every expectation of paying Uncle Sam when he taps you on the shoulder looking for his cut. You’ve built your personal brand, established a respectable work ethic and delivered quality work.
And how are you rewarded? With taxes — lots of them.
There are, however, some common tax deductions and credits that you can leverage to minimize your grief. Come tax season, these simple tips can help you lower your tax bill and make the most of your money.
Each year, you have an opportunity to contribute to retirement accounts and lower your taxable income. You can contribute either your entire income for the year or $6,000 — whichever is greater — to an individual retirement account (IRA).
If you choose to contribute the maximum amount to your IRA, you can delay your tax payments on this income. Retirement accounts offered through your employer are also useful and worth considering.
If you work for a private company, you may have access to a 401(k) plan and have the ability to contribute up to $19,000 in 2019 to this account. Likewise, if you work for a state agency, nonprofit or public university, you can contribute up to $19,000 to your 403(b) account. There are also 457 plans available to government employees with an identical contribution allowance.
Leveraging your access to these accounts is a way to lower your tax payments now and invest for the long-term to build some serious savings.
Once you’ve saved enough money, you can turn your attention to an important pathway to financial security: owning real estate. If you’re a homeowner, this is a way to lock in your mortgage payments and never worry about paying rent again.
In most areas of the country, the full amount of interest you pay on your home can be tax-deductible and lower your taxable income. If you’re a married joint-filing homeowner, you can deduct the interest associated with the first $750,000 of mortgage principal. If you’re a single filer, you can claim the same for the first $375,000 of principal.
If you have a mortgage balance that’s more than these levels, it gives you motivation to pay off your mortgage faster. And if you’re really smart and want to escape the condo vs. apartment decision that many Millennials are facing, consider becoming a landlord of your own.
Doing so will open a whole host of deductible expenses to shield your income, like MACRS depreciation, a prorated amount of your insurance costs, utility costs and other upkeep costs associated with marketing and maintaining the property for rent.
While subject to tax, these rental payments can be used to offset your living expenses and go a long way toward building your wealth. Plus, it’ll put you in a better position to reach financial independence.
Another way to save money on your taxes is to take advantage of the Saver’s Credit. The tax credit is a useful way for low- to moderate-income taxpayers to pay fewer taxes by saving for retirement.
Depending on your filing status and income, you can claim a non-refundable credit of up to 50%, 20% or 10% of the first $2,000 of your retirement contribution. This means you could receive a credit against your taxes of up to $1,000.
Keep in mind: Non-refundable tax credits can’t trigger a tax refund. Refundable credits — like the earned income tax credit or the solar energy investment tax credit — can have any unused balance for offsetting your tax liability come back to you.
It should come as no surprise that students going through college are leaving with student loans in tow. These loans have become a sad fact that many in our generation confront on a monthly basis every time we write a check to our loan servicer. For those of us who are lucky, we’ve managed to pay off our debt.
Fortunately, Congress recognizes the importance of having an educated society and gives you the ability to deduct up to $2,500 of student loan interest each year from your taxable income. While certainly not as nice as loan forgiveness, it’s a little something to keep in your pocket each year.
The downside is that, if you stand to earn a hefty paycheck after graduation, your ability to claim this deduction phases out. If you’re single, head of household or a widower tax filer, the deduction begins to phase out if your salary is $70,000 and is unavailable if you earn more than $85,000. If you’re a married joint-filers, the same phase-out amounts are $140,000 and $170,000, respectively.
For example, if you earn $70,000 as a single filer and deduct $2,500 in student loan interest, you’d receive the full deduction. But if you earn $75,000, you’d lose the ability to claim one-third of that benefit ($833), and would only be able to deduct $1,667.
If you consistently pay off your student loans, it can translate into a high credit score and have benefits flow through to your other personal finances.
If you’re invested in your career and need to pick up some new skills to advance, there are tax credits useful for defraying the cost of attendance in programs. Specifically, the Lifetime Learning Credit can be applied to qualified tuition and related expenses paid for eligible students enrolled in an eligible institution.
This credit can help pay for undergraduate, graduate or professional degree courses, including those to acquire or improve job skills. There’s no limit on the number of years this credit can be taken, and it can be worth 20% of the first $10,000 of qualified education expenses. The credit is non-refundable and is limited to $2,000 per tax return.
There are eligibility criteria on what constitutes a student, as well as income limits on the Lifetime Learning Credit. The credit gradually phases out for modified adjusted gross income between $57,000 and $67,000 ($114,000 and $134,000 for married, filing jointly). In other words, if you’re single and make more than $67,000 or married and make more than $134,000, you can’t claim the credit.
There’s another credit, the American Opportunity Tax Credit, that applies to the first four years of higher education. It allows for a maximum annual credit of $2,500 per eligible student and has a partially refundable nature. If the credit brings the taxes you owe to zero, you may retain 40% of any remaining amount of the credit (up to $1,000) refunded to you.
To be eligible for the American Opportunity Credit, you must be pursuing a degree or other recognized educational credential, be enrolled at least half-time, not have finished the first four years of college at the beginning of the tax year, not claimed the credit for more than four years or have a felony drug conviction.
Saving on your taxes can be helpful for keeping more money in your pocket each year. If you plan accordingly, they can add up to significant savings and create in added room in your annual budget.
Riley Adams, CPA, is originally from New Orleans but now lives in the San Francisco Bay Area, where he works as a senior financial analyst at a tech company. He also runs Young and the Invested, a personal finance site dedicated to helping young professionals find financial independence and live their best lives.