Many Americans are looking for any tax break they can find as the clock runs down toward the filing deadline. But before you just assume that a tax break is going to get the job done, you need to look at the details and make sure it will actually produce the tax savings you expect. Below, you'll find details on three popular tax breaks and some potential pitfalls you should know.
IRA contributions aren't always deductible
One of the most popular last-minute tax breaks that people use to reduce the amount they have to pay to the IRS is to make a contribution to a traditional IRA. IRA contributions for the 2015 tax year are allowed up until the April 18 tax-filing deadline, and typically, traditional IRA contributions give you a deduction you can use on your 2015 tax return.
If you're covered by a retirement plan at work, however, you might not be able to deduct your last-minute IRA contribution. The chart below has the various limits based on filing status for 2015. For example, if you're single and your modified adjusted gross income is more than $71,000, then you won't be able to claim an IRA deduction. If your income is between $61,000 and $71,000, you'll only be able to deduct a smaller amount.
Moreover, if you're married and your spouse had retirement plan coverage, your IRA might not be deductible even if you weren't covered by an employer retirement plan. Higher income limits of $193,000 for no deduction and $183,000 to begin the phase-out apply.
You have to file a return in order to receive the Earned Income Tax Credit
The Earned Income Tax Credit is designed to help low-income taxpayers by providing a tax break if they have work-related income. The amount of the credit depends on filing status, family size, and income, and some families can receive more than $6,000 under this tax break. Even better, the credit is refundable, meaning that you can get a refund from the IRS even if you don't need to use all of the credit toward reducing your tax liability.
The one thing that trips people up, though, is that even if you would otherwise not have to file a tax return at all, you must file if you want to get the Earned Income Tax Credit. That can affect many low-income families, because the tax filing threshold for joint filers for 2015 is $20,600. Reading the basic instructions, families with total income below that amount could conclude that they didn't need to file. But that would be a costly mistake, causing them to miss out on their credit and potentially lose thousands of dollars in tax benefits.
You have to pick the right state taxes to claim
You can deduct state and local taxes as an itemized deduction, but there's a choice you have to make. You can deduct income taxes or sales taxes but not both. Some states have either no income tax or no sales tax, and so the choice is obvious. For those in states with both types of taxes, you have to do the math both ways and pick the best answer.
Also, keep in mind that you can use the IRS state sales tax tables to come up with a figure for sales tax owed. You always have the right to claim your actual tax paid, but you're allowed to use the figure in the table even if you actually paid less than that amount in sales taxes during the year. If you don't know about the table, however, you could end up claiming too low a deduction and overpaying on your taxes.
These three tax breaks can give you lucrative savings on your tax return, but make sure you know how to claim them the right away. Otherwise, you could end up leaving money on the table that should have gone into your pocket.