The U.S. government gives a surprising amount of money to taxpayers in the form of tax breaks. Indeed, a Pew Research Center report found that the federal government paid out an estimated $1.3 trillion in tax breaks during 2016. If you're not already doing so, consider taking advantage of the most significant tax breaks available this year.
If your employer pays for all or part of your health insurance premiums, long-term care insurance, or healthcare costs, then you've benefited from a tax break that saved Americans $143.8 billion in a single year. What makes these benefits such a great deal is the fact that you're not required to pay taxes on their value.
Let's say your employer pays the full $300-per-month premium on your healthcare plan. If the company simply paid you $300 more a month to buy your own healthcare, you'd have to pay income taxes on that money, which would come to $3,600 in extra taxable income for that year. If you pay an effective tax rate of 10%, that would mean an additional $360 in taxes.
How to claim the tax break: If your employer already provides these benefits, no action is necessary on your part to get the tax break other than enrolling in the insurance plan. If your employer doesn't provide health benefits, consider lobbying for the addition of at least a basic health insurance plan.
Capital gains taxes
Long-term capital gains -- the profits investors realize when selling investments they've held for over a year -- are taxed at a considerably lower rate than regular income. In fact, if you're in the 15% income tax bracket or below, your long-term capital gains tax rate is 0%. Most taxpayers pay long-term capital gains tax at a rate of 15%. And if you have capital losses, you can use them to counteract your capital gains and thereby reduce or eliminate any capital gains tax. Last year, the difference between the discounted capital gains rate and the regular income tax rates saved taxpayers $134.6 billion.
How to claim the tax break: Hold on to investments and other assets for at least one year before selling them; that will get you the favorable long-term capital gains tax rate, instead of the higher short-term rate. If you've lost money on an asset, you can sell it in the same year you sell a highly appreciated asset to save even more on these taxes. Note that you should never sell an investment solely for the potential tax break. As long as you believe an investment will serve your long-term goals, hang on to it.
Tax-deferred retirement plans
Almost everyone needs to save money for retirement, and tax-deferred accounts allow you to reap big tax savings while pursuing that goal. When you contribute to a traditional 401(k) account, for example, you're paying with pre-tax dollars -- so you do not have to pay income taxes on the money you contribute. Traditional IRAs benefit from a similar tax break, except you have to claim the contribution as a deduction on your tax return instead of simply contributing pre-tax income. The favorable treatment of tax-deferred retirement contributions saved Americans $82.7 billion in one year.
How to claim the tax break: If your employer has a 401(k) plan, ask your human resources representative for instructions on how to enroll and start making automatic contributions. You can open an IRA with just about any bank or brokerage and fund it from your checking or other bank account. You'll need to claim IRA contributions as a deduction on your Form 1040; no paperwork is needed to claim the tax benefit for 401(k) contributions.
The mortgage interest deduction
One of the most popular itemized deductions, the mortgage interest deduction allows you to deduct all interest you paid on a mortgage for the house you owned and lived in during the year. This deduction often amounts to thousands of dollars, especially in the mortgage's early years, when most of your payments will be assigned to interest rather than principal. Indeed, this single deduction saved taxpayers $77 billion in 2016.
How to claim the tax break: Your mortgage lender should send you a 1098 form in January or February that lists how much mortgage interest you paid the previous year. You'll need to fill out a Schedule A form and submit it with your tax return to claim this deduction (in other words, you need to itemize your tax deductions instead of simply taking the standard deduction). On the current version of Schedule A, you claim the mortgage interest deduction on line 10.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is intended as a way to assist low- and middle-income taxpayers. If you meet the EITC's income requirements, you could receive a credit of up to $6,318 (in 2017). Because this is a credit rather than a deduction, it reduces your tax bill on a dollar-for-dollar basis. This could result in an enormous tax savings -- indeed, taxpayers saved $73.3 billion in 2016 thanks to the EITC.
How to claim the tax break: You claim the EITC on your Form 1040. In order to qualify for this credit, you must meet certain income requirements, but if you have dependent children, you can qualify even at a slightly higher income level. There's a special form -- the Schedule EIC -- that you'll need to fill out to determine how much you're entitled to claim, or you can ask the IRS to calculate the credit for you. IRS Publication 596 has all the gory details about eligibility and calculating the EITC. If this document makes your head hurt, consider having a tax professional prepare your return for you.