The sands of the hourglass are beginning to thin out, and this year's Tax Day, April 18, is quickly approaching for millions of Americans who've yet to file their calendar year 2015 taxes.
It's not too late to save thousands of dollars on your taxes
It's no secret that Americans procrastinate when it comes to preparing their taxes, but the actual data is truly eye-opening. According to the Internal Revenue Service, about 20% of taxpayers wait until the final week to prepare and file their taxes. With an estimated 150 million tax returns expected to be received through e-file and snail mail, we're talking about approximately 30 million Americans pushing the proverbial envelope.
Preparing our taxes is rarely any fun, as it means poring through a year's worth of financial receipts, bills, W-2s, and other potentially painful reminders we'd just as soon forget.
Of course, Tax Day is also a cause for joy for about four-in-five taxpayers, because they get federal refunds. Although tax refunds vary based on your income, deductions, and a number of other factors, average tax refunds in 2014 varied from a high of $3,126 per taxpayer in Connecticut to a low of $2,254 per taxpayer in Vermont. Still, with median annual household incomes of approximately $51,000 in the U.S., a $2,254 to $3,126 refund for a family of potentially undisciplined savers could make a big difference.
Yet I'd be willing to wager that a good number of these estimated 30 million taxpayers who have held off on filing tax returns have done so because they either expect to owe money or believe their refunds will be small. It's for this group of tax filers that I say there's still time for you to save what could be thousands of dollars on your taxes.
Here are three things you can do to save money on your 2015 taxes that you may not already be aware of.
Why pay to prepare if you don't have to?
First, be aware that a majority of Americans qualify for free tax-filing services or assistance from the IRS. FreeFile is an IRS software program that provides step-by-step tax preparation for Americans with incomes below $62,000 (remember, median household incomes are closer to $51,000). Not all state returns are necessarily free with FreeFile, but many are. Compare this to my personal tax situation, which resulted in a $104.99 cost to e-file. Depending on the complexity of your taxes and your income, you could walk away with an extra $40 to $200 in your pocket by preparing your own taxes with the help of the IRS.
To expound on this first point, IRS programs are also available for persons with disabilities and the elderly who might otherwise struggle to prepare their taxes. The Volunteer Income Tax Assistance (VITA) program is designed to help persons with disabilities and limited English-speaking taxpayers with incomes below $54,000 prepare their taxes, while the Tax Counseling for the Elderly (TCE) program focuses on tax help for taxpayers ages 60 and up.
Why pay for tax prep services if you don't have to?
Focus on your retirement
Generally speaking, any financial moves you wanted to make for your calendar year 2015 taxes should have been completed by 11:59pm on Dec. 31, 2015. Contributions to an Individual Retirement Account, or IRA, are an exception. You can make a contribution all the way up to April 18, 2016 and retroactively apply it to your 2015 tax filing.
There are two types of IRAs, each with their own unique set of rules and tax implications.
A Traditional IRA allows a contribution of up to $5,500 per year for persons aged 49 and under, with an extra $1,000 catch-up clause in place for those aged 50 and older. Thus if you're 50 or above you may contribute up to $6,500 in 2015 and 2016. Traditional IRA contributions are tax-deductible in the current year (thus 2015 in our case), but your ability to take that deduction depends on whether or not you have a retirement plan at work, and if your income exceeds certain levels. Assuming you qualify, a contribution to an IRA can help reduce your taxable income, possible saving you a lot of money in the process.
Your other option is a Roth IRA, which has the same contribution limits in 2015 and 2016 as a Traditional IRA. What differs with a Roth is that there are no upfront tax deductions. Instead, contributions to a Roth can grow tax-free for life as long as you don't make any unqualified withdrawals. Assuming you let your nest egg grow for 30 or 40 years, your tax savings with a Roth could dwarf that of the immediate tax savings seen with a Traditional IRA.
But there's a catch! Roth IRAs have income limits governing who can contribute and who can't, so you'll want to ensure you're aware of these income thresholds beforehand.
The key point to keep in mind is that a Traditional IRA can maybe get you a nice tax break now, but a Roth can get you a pretty sweet long-term tax break if you forgo any near-term deductions.
Invest in your health
Finally, should they qualify, taxpayers and their families can choose to contribute to a Health Savings Account, or HSA, up until Tax Day and retroactively apply it to their 2015 tax return.
An HSA is a tax-deductible medical savings account for consumers and families enrolled in high-deductible health plans. It's designed to help account holders pay for qualified medical expenses on a tax-free basis, as well as allow account holders to make contributions that are fully tax-deductible. As if that weren't enough of an incentive, the icing on the cake is that interest earned within an HSA is completely tax-free and can be continuously rolled over.
So how much can you contribute to an HSA? The latest inflation-adjusted contribution limit for 2015 calls for a maximum of $3,350 for individuals, and $6,650 for family coverage. The catch-up rule applies to HSAs as well, although it begins at age 55, not age 50 as with IRAs. Once turning 55, an additional $1,000 contribution can be made annually, or $4,350 per individual and $7,650 per family as of 2015.
Time may be ticking away to complete and file your taxes, but opportunities to save money still exist. Don't let these opportunities to save pass you by.