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3 Tips for Cutting Your Tax Bill

It’s tax time and for some Americans, that means ponying up a hefty chunk of change to the IRS. Thanks to some key changes, certain taxpayers could find themselves paying even more. If you’re looking to shave a few bucks off what you owe, you’ll need to plan your filing strategy carefully. Here are a few ways to trim your tax bill so you can hang on to more of your hard-earned cash.

Check out our federal income tax calculator.

Cut Your Taxable Income

While it’s too late to defer part of your income for tax year 2015, you still have opportunities to reduce the amount of your earnings that’s subject to tax. One of the easiest ways to do so is to sock away part of your income in a tax-advantaged account, such as an IRA or Health Savings Account.

Technically, you have until the April filing deadline to contribute the full amount to either type of account for the 2015 tax year. You can chip in up to $5,500 to an IRA ($6,500 if you’re over age 50). The max limit you can put in an HSA is $3,350 for individuals or $6,550 for families, plus an extra $1,000 if you’re over 55.

Claiming deductions for certain expenses is another smart way to lower your taxable income. Some of the things that are tax-deductible include unreimbursed medical expenses that exceed 10 percent of your adjusted gross income, home office expenses if you’re self-employed or work from home at least part-time, charitable donations of cash or property and any costs you incurred while performing volunteer work. This would include things like uniforms or travel expenses. Just make sure that you’ve maintained accurate records, such as receipts or mileage logs, for any deductions you plan to claim.

Homeowners who sold their home in 2015 can also take advantage of a special rule that allows them to exclude any gains from their taxable income. To qualify for this tax break, you must have lived in the home full-time for at least two out of the five years prior to the sale. For the 2015 tax year, single filers couple exclude up to $250,000 in gains while the limit increases to $500,000 for married couples who file jointly.

Balance Losses and Gains

Two things set to impact taxpayers for tax year 2015 are the 3.8% Medicare surtax on net investment income and the 39.6% tax bracket. The tax on net investment income will affect single filers with a MAGI of $200,000 or more and married couples earning $250,000 or more. The top tax rate applies to single filers making more than $413,200 and married couples who file jointly earning more than $464,850.

Related Article: 6 Common IRS Audit Triggers

If you have investment income, you may be able to use any losses to counterbalance the impact of your capital gains. As a general rule, short-term losses cancel out short-term gains while long-term losses are applied to long-term gains.

If you have any ordinary losses from the sale of stock or other securities, these can be deducted on your taxes. Even if you’re reporting only losses and no gains you can still deduct up to $3,000 from your income. If your net losses were more than $3,000 you can carry the loss over to the next tax year and apply them to any future gains.

Don’t Overlook Tax Credits

If you’re not taking advantage of every tax credit you’re entitled to, you could be seriously shortchanging yourself. A tax credit reduces the amount of tax you owe, dollar-for-dollar, making them even more valuable than deductions when you’re trying to cut your tax liability. Some credits are worth a few hundred dollars while others are worth several thousand.

Related Article: Making the Most of the Retirement Saver’s Credit

Some of the different tax breaks that are available include credits for making energy efficient improvements to your home, a credit for taxpayers who pay dependent care expenses and credits for qualified education expenses. There’s also the Earned Income Credit, which is designed to benefit taxpayers in lower income brackets. The more credits you’re able to claim, the less you’ll have to cough up to Uncle Sam.

Even though the tax filing deadline is drawing near, there are still plenty of things you can do to slash your tax bill. The more proactive you are about looking for tax breaks, the better off you’ll be when the April filing deadline rolls around.

Photo credit: GilmourKnotts

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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