Tax season is in full swing, with Tax Day 2018 coming up on Tuesday, April 17. Nobody likes to pay taxes, but there are several surprising ways that you may be able to ease the burden for yourself via legal tax deductions. Known as tax loopholes, these legal tax deductions exist for varying levels of income. As you file your paperwork this spring, consider these legal and legitimate tax loopholes that can save you money.
- Retirement Savings Accounts: Yes, you can get money back on your taxes simply by contributing to your retirement savings accounts! Here’s an example. If you contribute $5,000 to your employer-sponsored 401(k), your taxable income drops by $5,000. That equates to a federal tax savings of $1,250 if you are in the 25 percent tax bracket. This happens because accounts like a traditional 401(k) and IRA grow tax-deferred, which means contributions are not taxed at the time you make them; rather, you pay taxes on the withdrawals in retirement.
- Saver’s Tax Credit: This one is relevant to low-income individuals who need help saving for retirement. Via the saver’s tax credit, qualifying individuals are essentially paid to contribute money to their retirement accounts—from 401(k)s to traditional or Roth IRAs. Qualifications state that you must not be a full-time student, you must not be a dependent, and you must be 18 or older. For 2017, your income must be $31,000 or less if you are filing as single, $46,500 or less if you are filing as head of household and $62,000 or less if you are married and filing jointly. The amount of your credit will be 10, 20 or 50 percent depending on your adjusted gross income.
- Earned Income Tax Credit: This tax deduction was created to help low- to moderate-income families. The credit depends on the number of children in your household and your household income, with the income limit in 2017 ranging from $15,010 if you are single with no children to $53,930 if you are married and filing jointly with three or more children. Qualifying children must be 18 or younger unless they are full-time students, for which the age limit is 24.
- Mortgage Interest Deduction: Another among our tax loopholes is the mortgage interest deduction, beneficial for middle-income persons. If your mortgage qualifies, you can deduct your annual interest payments via the mortgage interest deduction (but not the principal). For tax year 2017, standard deduction amounts are $6,350 (single filing and married filing separately), $9,350 (head of household) and $12,700 (married filing jointly or qualifying widower).
- Child Tax Credit: This tax loophole can be worth up to $1,000 per qualifying child living in your household. It can be claimed in addition to the earned income tax credit. Qualifying children must be a dependent on your taxes, U.S. citizens and must have lived with you for at least half of the year. Your modified adjusted gross income must be less than $75,000 (single, head of household or qualifying widow or widower), $55,000 (married filing separately) or $110,000 (married filing jointly). The child tax credit us nonrefundable.
- American Opportunity Tax Credit: This tax loophole is an expansion of the Hope credit and applies to the first four years of college expenses. It can provide a tax break for tuition, books and other educational supplies—up to $2,500 per eligible student. Even if you don’t owe any taxes, up to $1,000 of the credit is refundable.
- Lifetime Learning Credit: Similar to the American opportunity tax credit, the lifetime learning credit helps offset educational costs for qualifying students—allowing you to claim up to $2,000 in qualifying educational expenses. Income caps are $65,000 if you are filing as single, head of household or qualifying widower and $130,000 if you are married and filing jointly. You cannot claim the lifetime learning credit if you are claiming the American opportunity tax credit, and vice versa. Also, unlike the American opportunity tax credit, the lifetime learning credit is nonrefundable.
Take advantage of these tax loopholes this tax season to maximize your tax refund and reduce your tax payout. Use the money you recoup to pad your emergency fund, or to contribute to your retirement savings accounts.
For more retirement savings tips, continue to follow Ty J. Young Inc.’s Retirement You Earned blog! To learn how you can maximize the amount of income you receive in retirement, call our qualified Ty J. Young Inc. advisors today at 877-912-1919.