Tax Day is almost here. Though Tuesday, April 18 is just around the corner, there are still some things you can do to lower your 2016 tax burden. Options include contributing to your SEP-IRA, contributing to a health savings account, and deducting state and local sales tax, in certain instances.
Contributions to your SEP-IRA and Health Savings Account are great ways to lower your tax burden.
Dentists: You can still reduce your 2016 tax burden, even with Tax Day almost upon us. Here’s what you need to do.
1. Contribute to your SEP-IRA by October 16. A SEP-IRA enables self-employed dentists to defer up to $53,000, or 20 percent of your net earnings. Great news: There’s still time to make a contribution to your SEP-IRA to lower your 2016 tax liability. You can fund your SEP-IRA up until your income tax filing deadline. That includes extensions. This gives anyone who files Schedule C until October 16, 2017 to drastically reduce their 2016 tax bills.
2. Contribute to your Health Savings Account by April 18. HSA Contributions lower taxable income, dollar-for-dollar. Account owners must have a high-deductible health plan with a maximum allowable out-of-pocket amount of $6,550 for an individual and $13,100 for a family to be eligible. HSAs have the added advantage of lowering taxable income. Distributions can be used for qualified medical expenses tax-free.
The annual contribution limit for 2016 is $3,350 for individuals and $6,750 for families. Participants age 55 or older can also make $1,000 of additional catch-up contributions. There are no income limits.
3. Deduct state and local sales tax if it’s greater than the income tax. If you itemize deductions, you can choose to deduct either state and local income taxes or state and local sales taxes you paid in 2016. Take whichever results in the largest deduction. Sales taxes paid on your home or on building materials can also be included.
Click to the next page to read tips 4 and 5.
4. Don’t assume something isn’t deductible. Find out for certain. Check with an expert before you decide whether an expense is deductible. If you use a tax preparer, ask him or her. If you do your own return, use a reputable source to make the decision, such as the IRS website.
5. Don’t overlook one-time deductions. Most people know about annual deductions, such as state income and local real estate taxes, because they happen every year. But less frequent deductions, below, can be valuable.
Theft, fire or other loss? You may be eligible for the casualty, disaster and theft loss deduction. First calculate the loss incurred from each casualty or theft event that occurred during the year, net of any salvage value, insurance or other reimbursement. And then subtract $100 per event. Now you have your net loss. You can deduct the net losses that exceed 10 percent of your adjusted gross income.
Nonbusiness energy property credit. Have you made energy-efficient improvements to your home, such as insulation, energy efficient windows and doors, or certain roofs? If so, you' may be able to claim a credit for 10 percent of the associated costs, excluding installation costs. However, installation costs for certain high-efficiency heating systems, air-conditioning systems, and water heaters and stoves that burn biomass fuel can be deductible. There’s a lifetime limitation of $500, of which only $200 may be used for windows.
Residential energy efficient property credit. Homeowners who make energy-efficient improvements to their primary residences can reduce their taxes by 30 percent of the cost of the qualified alternative energy equipment installed on or in their homes. Eligible are solar hot water heaters, solar electric equipment, and wind turbines. Unlike some credits, there is no dollar limit for most types of property, and any unused credit can be carried forward to the following year’s tax return.
Job-hunting costs. Expenses related to job hunting, such as travel, resume printing and mailing, and some placement-agency fees, can be deducted if you searched for a job in your current line of work.
Adoption. Tax benefits for adoption include a tax credit for qualified child adoption and an exclusion from income for employer-provided adoption assistance.
A closing thought: We can't read your mind. We tax professionals aren’t psychics. If you don’t tell us, we don’t know. Be sure you give your preparer everything that’s relevant. Ask if you’re not sure. That’s the best way to avoid missing a potentially valuable deduction.
Benjamin Sullivan, Certified Financial Planner (CFP®), Enrolled Agent (EA), is a client service and portfolio manager with Palisades Hudson Financial Group in Austin, Texas. Enrolled Agent is a designation granted by the IRS to tax preparers who meet its high standards. The firm handles hundreds of tax returns annually.
Palisades Hudson Financial Group is a fee-only financial planning firm and investment manager based Fort Lauderdale, Florida, with more than $1.2 billion under management. It offers financial planning, wealth management, financial management and tax services. Branch offices are in Atlanta; Georgia; Austin, Texas; Portland, Oregon; and Stamford, Connecticut.