What follows are some tax planning tips to keep in mind as the end of 2016 approaches.
Maximize 401(K) contributions
Contributing to your 401(k) can help save for retirement and lower your current taxable income. The current contribution limit per individual is $18,000. For those who are 50 years old and over you can make a “Catch-up contribution” of up to $6,000, for a total of $24,000. If you’re not currently contributing the maximum amount, consider doing so, after carefully analyzing your financial situation.
Your traditional IRA contributions can be tax deductible. Currently, your total yearly contributions are limited to $5,500, and $6,500 if 50 years old and older. The are certain limits and income thresholds to be aware of, so you want to make sure you talk to your financial advisor about contribution amounts and possible deductions. You have until April 15, 2017, to make contributions.
Health Savings Account
If your employer offers a Health Savings Account (HAS) or Flexible Spending Arrangement (FSA) you might want to look into the possibility of contributing a percentage of your pay into one of these plans. Generally speaking, you can use the funds inside these plans to pay for qualified medical expenses. The contributions are tax deductible or if taken from your pay check are pretax. All qualified medical expense distributions are tax-free. Currently, the HSA contribution limit is $3,350 for individuals and $6,650 for families. FSA currently has a contribution limit of $2,550.
The two most common mistakes I see are not taking advantage of the student loan interest deduction and not realizing that sometimes it can benefit you to file taxes as “Married filing Separately” if enrolled in an Income-Driven Repayment plan.
Let’s start with one of the so-called “above the line” tax deductions, student loan interest. This deduction can reduce the amount of income subject to tax by up to $2,500 if your Modified Adjusted Gross Income “MAGI” is within the limit of $80,000 if single and $160,000 if married and filing a joint return. Student loan interest is reported on Form 1098-E and it’s usually mailed out at the beginning of the year.
There are certain Income-Driven Repayment plans that, if married, your spouse’s income or loan debt will be considered only if you file a joint tax return. It’s worth analyzing, depending on your current financial situation if it makes sense to file separately. You need to run the different scenarios and choose the one with the highest net benefit.
I recommend you take a proactive approach to tax planning and consider it part of a year-round process. Let me know if I can help!
Hermes Conesa CEO @ Simpleivest