Tax time is approaching, and you deserve every tax break you can get in order to pay less to Uncle Sam. Fortunately, there are some huge opportunities to take advantage of tax provisions that are designed to help save you money. Below, we'll look at three of the most valuable tax deductions that taxpayers frequently use to reap massive savings year in and year out. Take a look below and see if you can take advantage of these provisions to reduce your tax bill.
1. Traditional IRA contribution deduction
Perhaps the most popular tax break you can use to reduce your income tax bill is the deduction for traditional IRA contributions. For both the 2016 and 2017 tax years, you can contribute up to $5,500 from your earned income to an IRA if you're younger than age 50, or $6,500 if you're 50 or older. The money you contribute to the IRA then gets to grow on a tax-deferred basis, meaning you won't have to pay any taxes on the income or capital gains that your investments produce within the IRA. Only when you withdraw money from the account in retirement will you face paying income tax on your withdrawn amount. On average, taxpayers who claimed IRA deductions contributed almost $4,900 toward IRAs in the most recent year for which IRS data is available, producing tax savings of nearly $2,000 for some high-income taxpayers.
The best part about IRA contributions is that you don't have to itemize the deductions. Instead, they're taken as adjustments to gross income, making nearly everyone eligible to get the IRA tax break. The other major benefit of IRA contributions is that you have until mid-April to make contributions for the previous tax year, giving you one of the only last-minute opportunities to cut your tax bill late in tax-preparation season. Some income limits do apply to deductions for IRA contributions if you or a spouse has access to a retirement plan at work, but for many, contributing to a traditional IRA is the best way to cut their tax bill.
2. Home-related tax deductions
For many, homeownership is the American Dream, and the tax laws have a number of provisions that give tax breaks to homeowners. Mortgage interest is generally deductible, and currently, so too are premiums for private mortgage insurance. Those two provisions alone added up to more than $10,000 in deductible expenses for the typical American's tax return in the most recent year for which data is available.
Yet other provisions also favor homeowners. Real-estate property taxes are also deductible, and that led to write-offs of almost $5,000 more on the typical return.
Keep in mind that home-related tax deductions are generally available only if you itemize your deductions. Those who take the standard deduction are typically out of luck. However, the large tax breaks from homeownership are often sufficient by themselves to justify itemizing rather than taking the standard deduction, and that's something to keep in mind as you prepare your return.
3. Gifts to charity
The end of the year is a popular time for Americans to make charitable gifts to their favorite causes. Not only do those donations do a lot of good for the organizations that receive them, but the donors can also typically get a nice deduction against their taxes. The average taxpayer claiming a charitable deduction claimed an average of more than $5,800 in eligible donations in the most recent tax year for which information is available. That translates to tax savings of more than $2,000 in some circumstances.
Many people make cash gifts to charity, which is simple and easy. However, alternatives can be even more lucrative. For instance, you can give stock that has gone up in value to charity and avoid having to pay any capital gains tax you would owe if you sold the stock outright. Combine that with your regular tax deduction, and you can get a lot more bang for your buck by structuring your gift in the best way available.
These deductions aren't the only tax breaks available to taxpayers in 2017, and you might not be able to claim all of them. Nevertheless, by being aware of all the potential benefits that are available to help you cut your tax bill, you'll avoid paying any more than you absolutely have to pay when tax time rolls around.