Here comes everyone's favorite time of the year -- tax time! It's no fun writing checks to Uncle Sam that deplete your precious coffers, but take heart -- there are some ways that you can legally reduce the taxes you owe in 2016.
Below are a few such ways -- and note that they're good ways to reduce your taxes in future years, as well.
Contribute to an IRA!
It's not yet too late to make an IRA contribution for the 2015 tax year, even though we're well into 2016. The contribution deadline for IRAs is typically the day on which your tax return for that year is due, but because of holidays, it's April 18, 2016, for most taxpayers and April 19, 2016, for those in Maine and Massachusetts.
If you contribute to a Roth IRA, you can set yourself up for future withdrawals in retirement that are tax-free, but it won't reduce your taxes this year. Contribute to a traditional IRA, though, and you can save this year. The contribution limit for IRAs is $5,500 this year (and next year), plus an additional $1,000 for those aged 50 and older. If your income this year is $60,000 and you make a $6,000 contribution for 2015 into a traditional IRA, it's as if your income is just $54,000. If you're in the 25% tax bracket, you can avoid paying 25% on the $6,000 you invest. (With traditional IRAs, you do get taxed eventually, when withdrawing money in retirement.) When you send in a 2015 contribution in 2016, be sure to specify on your check and any accompanying paperwork what year the contribution is for.
Contribute to an HSA!
If your health insurance plan features a high deductible, you can open a Health Savings Account (HSA), funding it with pre-tax dollars that you can spend on qualified health expenses. The deadline for funding an HSA is the same as that for IRAs -- April 18 for most of us.
With an HSA, if your insurance plan has a deductible in 2015 of at least $1,300 for single-person coverage or $2,600 for family coverage, you can qualify to sock away up to $3,350 (for singles) or $6,650 (for families) -- plus an extra $1,000 for those 55 and older. The money is meant to be spent on qualifying healthcare expenses, but whatever isn't spent remains in the account and can be invested and grow. Whatever hasn't been spent by the time you reach 65 can be withdrawn for non-health-related expenses. In other words, it's kind of like a retirement account, too! (As with IRAs, if you send in a 2015 contribution in 2016, be sure to specify on your check and any accompanying paperwork what year the contribution is for.)
Grab those deductions and credits!
Many people pay more in taxes than they need to -- especially if they prepare their taxes on their own. It can be worthwhile to invest in some tax-prep software -- because not only can it save you time and energy, but it can also, after asking you lots of questions, flag deductions and credits that you may qualify for. Remember that a deduction will let you reduce your taxable income, thereby reducing your tax bill, while a credit will reduce your tax bill itself, dollar for dollar.
The range of available deductions and credits is mind-boggling. You can get tax relief from everything from medical expenses to charitable donations, the adoption of a child, business travel, education expenses, the cost of caring for dependents, energy-efficient home improvements, foreign taxes you paid, job-hunting costs, moving expenses, and refinancing points paid, among many other things.
It can be worth hiring a tax professional to prepare your return, too, even if that costs several hundred dollars -- as you may end up saving several thousand dollars, via deductions and credits and also through tax strategizing.
The more you learn about taxes, the more money you may be able to keep in your own pocket instead of Uncle Sam's pocket.