If you're like most Americans, you'd love to lower your tax bill in 2016. Fortunately, there are several ways you could do just that, and many of these ways have other benefits as well. For example, if you save more money for retirement, not only do you get a nice tax break now, but you'll have a larger nest egg later on. With that in mind, here are five suggestions that could save you big bucks on your 2016 taxes.
Going green can get you big tax credits
One of the most lucrative tax breaks available is for clean energy. For example, if you buy a plug-in electric car (including plug-in hybrids), you can qualify for a tax credit of up to $7,500 depending on the car's battery size. Note that this is a credit, not a deduction. In other words, if you buy a qualifying electric car, it could take $7,500 off your tax bill, or add it to your refund.
Another type of credit is for energy-efficient home improvements. The first is called the Residential Energy Efficiency Property Tax Credit, which is worth 30% of the cost of a solar energy system, solar-powered water heater, wind turbine, geothermal heat pump, or a fuel cell that generates power for your home. So, if you install a $25,000 solar power system, it can get you a $7,500 tax credit.
Finally, the Nonbusiness Energy Property Tax Credit is worth a maximum of $500 toward certain energy efficiency improvements you make on your home. To name a few things, the credit can be claimed for 10% of the cost of energy efficient windows, doors, roofing, air conditioning systems, water heaters, and more.
Save more for your future
Retirement savings is perhaps the best tax break available. I say this because not only can contributing to your retirement accounts get you a nice tax break now, but you'll end up with a bigger nest egg down the road.
For 2016, you can save up to $5,500 in a traditional or Roth IRA, with an additional $1,000 "catch up" contribution allowed if you're over 50. Keep in mind that Roth contributions won't save you any money on your 2016 taxes, but you'll pay no taxes when you withdraw the money in retirement. 401(k) limits are even more generous. You can choose to have up to $18,000 of your salary deferred into your employer's plan ($24,000 if over 50), and this is in addition to any matching contributions from your employer.
While it's usually not necessary (or practical) to completely max out your retirement savings, you might be surprised about the benefits of more aggressive retirement saving, both now and in the future.
Let's say that you manage to save a total of $10,000 between your 401(k) and traditional IRA every year. If you're in the 25% tax bracket, this translates to $2,500 in tax savings per year. What's more, based on the stock market's historical average performance, this could build up a $1.5 million nest egg after 30 years.
Unload your bad investments
Many people don't realize that if you sell investments at a loss, you can use it to offset any capital gains taxes. Known as tax-loss harvesting, this can make a big difference in your tax bill in 2016 if you have some losing stocks sitting in your portfolio. For example, if you sell some of your stocks at a $5,000 profit, but sell another at a $2,000 loss, you'll only pay capital gains taxes on the $3,000 net gain.
Even if you don't have any profitable investment sales, you can use up to $3,000 worth of losses to reduce your taxable income. And, if you have more than this amount of losses, the excess can carry over until next year.
So, if you're sitting on some stocks that just didn't work out the way you had hoped, maybe now is the right time to finally cut your losses and put that money to work elsewhere.
Small donations can add up
The charitable contribution deduction is no secret -- most people who donate considerable amounts of money or property are well aware of the tax benefits. However, too many people underestimate the tax-saving power of their smaller donations and don't even keep track of them.
As a personal example, I generally hit the "donate $1.00" button when I'm checking out at the grocery store. And, while these donations may seem insignificant all by themselves, I gave a dollar nearly 70 times last year. Most people I know wouldn't pass up a $70 tax deduction, and you shouldn't either. Throw these receipts in an envelope, and you may be surprised at how much they add up to at the end of the year.
There are other donations many people make along the way. For example, if you go to a charity car wash or similar fundraiser and donate $10, pay with a check, so there's a record of the contribution. Many people can get a pretty nice deduction just for keeping track of small donations, so save your receipts and watch it add up.
Become a homeowner
We've written before about the tax breaks available to homeowners, and I believe it is one of the most compelling reasons to consider buying. Just for owning a home, you can save thousands of dollars each year on your taxes through a combination of tax deduction.
First off, most people know about the mortgage interest deduction. The IRS lets you deduct any interest you pay on a mortgage on a first or second home, on up to $1 million in original mortgage balances.
In addition, you can deduct any "points" you paid to obtain the mortgage, as well as any mortgage insurance premiums you pay on an ongoing basis (subject to income limitations). This can be a big benefit, especially for first-time homebuyers who take advantage of low down payment mortgage programs and have to pay PMI.
As if this wasn't enough, you can also deduct your property taxes each year. This benefit can vary dramatically based on the area of the U.S. you live in, but for residents of high-tax areas like my home state of New Jersey, this tax break alone can be worth thousands.
How much could you save?
Now, I understand that it's probably not practical for you to do all five of these things in 2016. Maybe you don't have any bad investments to sell, or your current life situation doesn't allow for homeownership.
However, if you incorporate just one or two of these suggestions into your 2016 financial planning, it could save you thousands in taxes. Just as an example, if you're in the 25% tax bracket, and you set aside $5,000 in a traditional IRA and sell some stock at a $2,000 loss, you're looking at $1,750 in tax savings -- and that's in addition to the other long-term benefits that come with doing these things.