As tax time rolls around, most of us will be looking to reduce our annual tax bill as much as possible. Since no one is going to want to lower their income, the best way to pay less in taxes is to make sure you’re not missing out on any big deductions. Below is a checklist of possible year-end deductions to consider.
Deductions for Contributions to a Traditional IRA. Depending on your income and whether you’re covered by a retirement plan at work, you may be able to contribute to a traditional IRA for tax year 2013 and deduct the full amount. Alternatively, you may decide that the value of a tax deduction this year is outweighed by the aggregate tax savings you’d realize by contributing to a Roth IRA instead.
Your Home Mortgage Interest Deduction. For years. one of the most valuable deductions for U.S. taxpayers has been the home mortgage interest deduction. While there are some limitations on the availability of this deduction (most notably, that it relate to the taxpayer’s primary residence or second home, and that only the first $1,000,000 of debt is covered), most homeowners can save significantly on their taxes if they have a mortgage on their homes. The amount you pay each year in property taxes is similarly deductible.
Charitable Contributions. Cash and non-cash property contributions to nonprofit charities are generally deductible, but you should take care to properly document your contribution worth more than $250. and to verify that the recipient is appropriately recognized as a nonprofit charity.
Educational Expenses and Student Loan Interest. Depending on your income, you may be able to deduct a certain amount of tuition-related expenses, and a portion of the interest relating to any student loans you may still be repaying. You may also be able to make deductible contributions to certain types of tax advantaged college savings accounts for your children.
Review the Applicable Caps and Limitations. It’s essential that you understand the various limitations and caps on certain types of deductions. Charitable deductions, for example. are generally limited to either 30% or 50% of your adjusted gross income. These caps and limits can change from year to year, so don’t assume that the rules you followed in prior years still apply.
Pre-Tax Contributions. In addition to the deductible contributions you itemize on your tax return, be sure to consider any available opportunities you have to make pre-tax contributions that will benefit your overall financial situation. For example, contributions to an employer-sponsored 401(k) plan or to a health savings account are generally made with pretax dollars. This lowers your adjusted gross income, which effectively lowers the amount of tax you pay and potentially makes other deductions available to you (by virtue of your lower AGI).
Every year you must balance the overall value of these deductions against the standard deduction. Most middle and higher income taxpayers (particularly homeowners) will benefit from itemizing, but that’s not always the case.