Here are three deductions which could be considered “the holy grail” of deductions. That is, they can greatly reduce your adjusted gross income.
1. Contributing to a traditional IRA
One of the best ways to reward yourself now — and later — is by contributing to a traditional IRA. A traditional IRA has a maximum annual contribution limit in 2016 of $5,500 for workers aged 49 and under and $6,500 for those ages 50 and up. In most cases, you’ll be able to deduct the amount of your contribution from your current-year tax liability, thus beefing up your refund or possibly reducing what you’ll owe the IRS.
Best of all, contributing to a traditional IRA means you’ll be saving for your future and reaping the rewards of time and compounding. Although you’ll have to pay ordinary income tax when you begin making withdrawals from the IRA during retirement, you can generate substantial returns over time that can help diversify your retirement income stream away from just Social Security. A traditional IRA is a nice way of garnering a meaty deduction now and building your retirement nest egg for later.
2. Contributing to a Health Savings Account
Another sought-after above-the-line deduction is contributing to a Health Savings Account, or HSA.
In order to qualify for an HSA, you or your family would need to be enrolled in a high-deductible health plan (HDHP) with individual maximum out-of-pocket amounts exceeding $6,550 or family deductibles over $13,100 in 2016. If you qualify and are indeed enrolled in an HDHP, you’ll have an annual HSA contribution limit of $3,350 as an individual or $6,750 as a family. There’s also an additional $1,000 HSA catch-up contribution for those aged 55 and up. A word to the wise, though: You can’t be enrolled in Medicare or be claimed as a dependent on someone else’s tax return in order to qualify for an HSA.
The advantages of an HSA are twofold. First — because it wouldn’t be mentioned here otherwise — you have the ability to deduct what you contribute to an HSA from your AGI. Second, HSA accountholders are able to make tax-free withdrawals at any age to pay for qualified medical expenses. In case you haven’t noticed, medical care isn’t getting any cheaper, making this tax-free plan quite beneficial.
3. The tuition and fees deduction
Last, but not least, tuition and fees are treated as an above-the-line deduction that can help you out in more ways than one.
It’s important to understand that this deduction has different rules from some other educational tax benefits. According to the IRS, deductible expenses include the tuition and mandatory enrollment fees paid to attend college or a trade school above the high school level count. What doesn’t count are room and board fees and the price you pay for books and other school supplies (unless you’re required to buy them from the school). You also can’t claim these deductions if you can be claimed as a dependent on someone else’s tax return, and you must deduct the value of scholarships from your tuition expenses.
Most importantly, the IRS doesn’t allow a double benefit for educational expenses. Therefore, if you are claiming the American Opportunity Tax Credit or Lifetime Learning Credit, you can’t also take a deduction for tuition and fees for the same student.
What sort of deduction could you qualify for? According to the IRS, you’ll receive:
- A $4,000 deduction if your modified adjusted gross income (MAGI) is below $65,000, or $130,000 for joint filers;
- A $2,000 deduction for MAGI between $65,000 and $80,000, or $130,001 and $160,000 for joint filers;
- And $0 for any MAGI above these limits.
In short, going to college nets you a nice upfront tax discount, and it can pay off in a big way down the road in terms of higher income and more ability to save for your future.
Looking for ways to save on your taxes and plan ahead for a bright financial future? Don’t hesitate to call Williams & Kunkel CPAs today in Flower Mound at 972-446-1040 to have a chat.
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Source: Motley Fool