If you paid way too much in taxes this year, I have a simple solution for you – reduce your taxable income, and you will reduce your taxes. But before you tell your boss you are quitting to save taxes, here are a few tips to try.
- Contribute to retirement plans. Whether you are working for someone else or are self-employed, there is a retirement plan for you. If you have a 401(k) or 403(b) plan available at work, contribute as much as you can. Be sure at least to contribute the minimum needed to capture the entire employer match.
- Contribute to flex spending plans. If your employer lets you contribute pretax funds to a flexible spending plan for expenses such as medical costs and dependent care, take advantage of it. A flexible spending plan (FSA) provides a way to reduce taxable income by setting aside a portion of your earnings in a separate account managed by your employer. An FSA has a contribution limit of $2,550 for the 2016 tax year, and the total balance must be used each year contributions are made unless your employer has the carryover option or grace period option.
- Let Uncle Sam pay part of your auto costs. Whether self-employed or an employee, if you use your vehicle for business, take a tax deduction for the mileage at 54 cents per mile. But be sure you keep records: a listing or daily calendar in which you jot down the mileage and purpose of the trip is sufficient. Commuting costs aren’t deductible, so the mileage from your home to your regular office isn’t tax deductible. If your office is at home, you’re in luck, since your mileage is deductible from your garage door to your business destination and back again.
- Buy a home. Home ownership is one of the last tax shelters available to the middle class. When you own your own home, you build wealth as your home increases in value and your mortgage is paid down over the years. And on top of that, you can take a tax deduction for the mortgage interest and property taxes you pay, reducing your taxable income.
- Take a deduction for your home office. Many business owners shy away from the home office deduction because they are afraid they will be audited. But deducting a home office won’t occasion an audit, as long as the home office is directly related to your business. It must be a space that is used only for business, but it doesn’t have to be a full room. So if you have a corner of the living room that’s used exclusively and regularly for an office, by all means, take the tax deduction based on a portion of your home-related expenses such as rent, mortgage, insurance, utilities, repairs and maintenance and the like. The IRS also allows you to take the simplified home office deduction worth up to $1,500.
- Hire your kids. If you own your own business and your children are old enough to work in your business, doing jobs such as filing, computer input, distributing flyers, etc., then you can pay them for their labor and take a deduction. Since they are working for you, there isn’t any social security or medicare tax on their wages if they are 18 or younger and your business isn’t incorporated. And they can earn up to $6,300 without having to file a tax return. Even if they save the money for college or contribute it to a Roth IRA, you’ll get the deduction, so it is a great way to benefit your child’s future while decreasing your tax bite.