Looking for ways to cut your tax bill at tax time? It might pay to think like the rich. While you may not be able to take advantage of every tax deduction they do, you can still follow along in their footsteps when it comes to these tax saving moves.
Mortgage interest deduction
One of the best deductions available to income earners is the mortgage interest deduction, yet many moderate- to middle-income families fail to make the most of it.
Mortgage interest on a first and a second home is usually tax deductible, as is interest on home equity lines of credit and home equity loans, up to certain limits. Because of this, maximizing the amount of money owed on these forms of debt and minimizing how much is owed on non-deductible debt, such as credit cards, can mean more money in your pocket at tax time.
Pretax retirement accounts are available to many working Americans, yet many people fail to take advantage of them. Some people avoid contributing to these plans altogether, while others fail to sock-away the maximum amount allowed every year.
Don't make that mistake.
In 2016, up to $18,000 can be contributed to a 401(k) plan or a 403(b) plan, and another $6,000 catch-up contribution can also be made if a plan participant is over 50 years old.
People with a retirement plan at work can also make a tax-deductible $5,500 contribution to a traditional IRA (plus a $1,000 catch-up contribution if they're over 50), up to certain income limits. For a couple filing jointly, a traditional IRA is fully deductible up to $98,000 in income.
Make more than that? Maybe it's time to consider a Roth IRA. Roth IRAs don't give you a tax break up front, but withdrawals in retirement can be tax free, and that could save money on your future tax bills.
Finally, if you're self-employed, take the time to consider the pros and cons of an SEP-IRA plan. In 2016, business owners can contribute the lesser of 25% of their compensation or $53,000 to an SEP-IRA -- that's a big tax break.
Use health savings or flex spending accounts
Another great way to save money at tax time is to pay for out-of-pocket healthcare costs, such as co-pays, with pre-tax money set aside in a health savings account or a flex spending account.
Health savings accounts can be used with high-deductible health insurance plans, and in 2016, a family can contribute up to $6,750 in one. However, because health savings accounts don't work with every health insurance plan, make sure you have a qualifying plan before setting one of these plans up.
Employer-offered flex spending accounts can be another good option for people who want to pay for healthcare costs with pre-tax money. In 2016, up to $2,550 can be contributed to an FSA that can be used to cover healthcare expenses not covered by insurance. However, FSAs do have one important catch. They are use-it-or-lose-it plans, so carefully calculate potential expenses beforehand so that you don't end up over-contributing to them.
Plan ahead for college
Although money contributed to 529 plans, or qualified tuition plans, isn't tax deductible, that money can grow tax free if it's used to pay for future college expenses.
There are two types of 529 plans: prepaid tuition plans that allow people to buy credits for future tuition, and college savings plans that allow people to invest money that can be used to pay future college expenses.
The amount of money that can be contributed to a 529 plan varies, but limits can be as high as $200,000. Contributions above annual gifting limits can trigger a gift tax, so consult your accountant and plan accordingly.
Interested in sending your child to a private elementary or secondary school? A Coverdell Education Savings Account (ESA) may also be a good option if your income is below limits. Like 529 plans, contributions to ESAs aren't deductible, but accounts can grow tax free and up to $2,000 can be aside annually per beneficiary. Generally, individuals can contribute to ESAs if their income is below $110,000, and couples filing jointly can contribute if their income is below $220,000.
Coverdell ESAs can also be used to pay for college, but they aren't transferable and they must be used by the time the beneficiary turns 30.
Make the most of depreciation
Depreciation is a deduction that allows taxpayers to recapture the cost of certain property, such as building or an automobile. It's an annual deduction for wear and tear and deterioration of property.
To depreciate something, the property has to qualify and generally, that means that the property has to be used in business or to produce income.
Anyone considering depreciation strategies should consult with their accountant, but one example of property that can be depreciated for tax savings is an apartment building. Since apartment buildings are expensive and they can be depreciated over the course of many years (using a depreciation schedule), they can offer significant tax savings. Just remember, depreciation can reduce your cost basis and that can affect your eventual capital gain and loss on the property, too.