It may be September, but that doesn't mean that there aren't some savvy moves you can still make for this year that can reduce your tax bill next April. Here are three ideas that could still take some of the sting out of paying Uncle Sam.
No. 1: Ramp up retirement
One of the best ways to lower your taxable income is to make the most of workplace retirement plans, including 401(k) and 403(b) plans, yet 42% of millennials report that they haven't started socking away any money in these accounts.
401(k) and 403(b) plans allow workers to contribute a percentage of their income -- pre-tax -- into an account that can eventually kick off income at retirement. In most cases, the money that's contributed to them can't be withdrawn without a penalty until you are at least 59.5 years of age, and withdrawals from these accounts will eventually be taxed at your future income tax rate.
In 2016, workers can contribute $18,000 to these plans, up to their earnings, and workers over 50 years old can contribute up to $24,000. Given how much pre-tax money can be set aside in these accounts and how few people are making the most of this opportunity, bumping up your contributions at the end of the year could be a no-brainer tax-saving move.
No. 2: Investigate an FSA or HSA
Many employers offer flexible spending accounts (FSAs) or health savings accounts (HSAs) that workers can stash pre-tax income into, too. Enrollment in these plans is done during your employer's open enrollment period. However, if your family has recently had a qualifying life event, you may still be able to take advantage of these tax savers.
FSAs can be used to pay medical expenses, such as dentist visits, co-pays, and laser eye surgery, and in 2016, up to $2,550 can be contributed to an FSA. FSAs can be used regardless of the type of health insurance you have, but unless your plan has a grace period, FSAs require contributions to be spent in the same year that they're made. Because of the use-it-or-lose-it nature of FSAs, make sure you don't contribute more to one than you think you'll spend before the end of the year.
Qualifying life events that can allow you to enroll into an FSA or increase your contribution outside of open enrollment include marriage, the birth or adoption of a child, or a job change.
Like FSAs, HSAs are accounts funded with pre-tax money that can be used for qualifying medical costs. However, HSAs are available only to people who are enrolled in high-deductible health insurance plans. If you're not sure if your plan qualifies for a HSA, check with the plan or your human resources department before contributing to one.
In 2016, you can contribute $3,350 for an individual or $6,750 for a family to an HSA, and importantly, unlike FSA contributions, money that's contributed to HSAs can be rolled over into future years. Because HSA contributions don't have to be used in the year they're made, HSAs can be an excellent long-term-planning tool for saving money for unexpected healthcare expenses in retirement.
There are fewer life events that allow changes to be made to HSAs outside of open enrollment, but if you had a job change recently you may qualify.
Overall, the tax-saving benefits associated with FSAs and HSAs can be substantial, so even if you don't qualify to enroll this year, make sure that you consider enrolling for next year during your employer's next open enrollment period.
No. 3: Enroll in college
If you or your spouse is debating enrolling in a graduate- or undergraduate-degree program, consider doing it now. Money that gets spent on tuition and enrollment fees before the end of this year can result in a nice tax deduction.
If your modified adjusted gross income is below $65,000 (if filing individually) or $130,000 (if filing jointly), you can get a $4,000 deduction for qualified expenses. If you're an individual and your income is between $65,000 and $80,000, or a joint-filing couple with an income of $130,001 to $160,000, then your deduction is $2,000. If you earn more than that, you don't qualify for a deduction.
The potential tax savings associated with this deduction can be significant, but you'll need to take advantage of this tax break fast because it expires at the end of 2016. You should also know that as long as your education begins during the first three months of next year, any money you spend in 2016 will still qualify for the deduction.
Additionally, bear in mind that you won't be able to deduct money spent on surrounding expenses like room and board, books, or school supplies, and that the deduction doesn't apply if you're claimed as a dependent on someone else's tax return.
Tying it together
Now is the perfect time to take a look at what you've earned so far this year and calculate how much you think you'll earn for the whole year, because these tax-saving moves can pay off handsomely if they drop you into a lower tax bracket. For example, a single person will pay 15% income tax on income below $37,650 and 25% on income between $37,650 and $91,150 this year. So, if you're making $40,000 in 2016 and you can get your taxable income below $37,650, you could end up saving hundreds of additional dollars at tax time.