There are several ways that people can legally reduce their taxes by doing certain behavior the government wishes to reward. Make sure to remember these last minute items when filing taxes in 2015.
Common Tax Deductions for 2015
In short, do things the government incentivizes through the tax code. I’m just going to spout off the ones that come to mind and this is by no means complete. Some of them may sound ridiculous but all have positive tax consequences.
- Have children. Bonus points if they’re adopted!
- Financially support dependents like a relative
- Keep health insurance (both to reduce your pretax income and to avoid the Obamacare penalty)
- If your employer makes it available, take advantage of a pre-tax transportation program
- Save money for retirement though a traditional IRA and/or a 401k through your employer
- Move somewhere far away to start a new job
- If you’re divorced, pay alimony
- Go back to school
- Incur thousands of dollars in qualified medical expenses
- Donate thousands of dollars to qualified charities
- Suffer a causality of theft that exceeds 10% of your adjusted gross income
- Make qualified energy efficiency improvements to your home
- Buy a qualified alternative fuel vehicle
Earn Tax-Free Income to reduce Taxes
Certain types of income aren’t subject to income tax at all. The single best way to avoid taxes is to earn as much tax-free income as possible. There are many ways to do this. Some of the most common are selling your home (the home sale tax exclusion), saving money for your children’s education, investing in municipal bonds, contributing to a health savings account, receiving health insurance and certain other employee benefits from your employer, spending some of your salary on out-of-pocket health costs, and giving some investments to your children.
Take Advantage of Tax Credits
Obtaining a tax credit is the next best thing to paying no taxes at all because it reduces your taxes dollar for dollar — something a deduction does not do. Congress has taken a great liking to tax credits in recent years and is adding new credits all the time. Some examples include tax credits for buying a hybrid car or making certain home energy improvements, such as adding insulation or a solar water heater to your home. There are also child and child care tax credits and education tax credits.
You’ll have to pay income tax on your taxable income sooner or later, but you’ll usually be better off if you make it later. Deferring payment of taxes to a future year is like getting a free loan from the government. There are many ways to do this, from postponing an employer bonus to investing in IRAs and other retirement accounts. Step 4: Maximize Your Tax Deductions. Perhaps the most well-known way to reduce taxable income is to take tax deductions.
What is the benefit of tax deductions?
The more deductions you have, the less tax you’ll pay. People in business can deduct all their business expenses, such as inventory, office or home office, travel, operating costs, and so on. Every taxpayer is entitled to take a standard deduction or itemize their deductions. Itemized deductions are usually personal in nature and include things like your home mortgage interest, property taxes, charitable contributions, and state income tax. There are many ways you can increase your business or personal itemized tax deductions.
Reduce Your Tax Rate
Federal income tax rates can vary dramatically, from as low as 0% (capital gains tax rate for people in the 10% and 15% tax brackets) to as high as 39.6%. You can benefit from the lowest rates available if you earn income from long-term investments like stocks, bonds, mutual funds, and real estate. The profits you earn from these investments are taxed at long-term capital gains rates, which are lower than federal income tax rates. The capital gains tax rate on long-term gains is 20% for people in the highest tax bracket (39.6% marginal tax bracket). For anyone in the 25%, 28%, 33% and 35% tax brackets, the capital gains tax rate is 15%. The rate is zero for people in the 10% and 15% tax brackets. In contrast, the average working stiff must pay income tax on salary or business income at ordinary income rates, which can be as high as 39.6%.
Shift Income to Others
If you’re in a high tax bracket you can save substantial taxes by shifting your income to someone in a lower tax bracket–for example, your children. This process is called income shifting or income splitting. Recent changes in the tax law make this harder to do than it was in the past, but it’s still a viable planning tool for many taxpayers. Step 7: Take Advantage of Your Filing Status and Tax Exemptions. Few people give much thought to their tax filing status, but it can have a big effect on the taxes you pay.
Choosing a tax filing status
Which filing status you choose (and taxpayers often have a choice) will determine the tax bracket you fall in. Your filing status is also crucial for calculating your standard deduction, personal exemptions, and income levels for phase-outs of your itemized deductions and personal exemptions. It’s also important to know about tax exemptions and which ones you are entitled to take. There are personal exemptions for you and your spouse and dependent exemptions for children and other family members. Not everyone can take advantage of tax exemptions because they are subject to income restrictions.