Every year, millions of taxpayers miss out on chances to lower their tax bills.
They miss deductions or don’t exploit tax breaks designed to lower the costs of education, retirement and health care. The problem is that most smart tax planning strategies require you to think about taxes long before they’re actually due and by the time you have a 1040 in front of you, it’s too late.
But you have plenty of time right now to get ahead on next year. Here are some of the strategies that accountants and lawyers say taxpayers most often fail to exploit:
Get more organized: The No. 1 way people sabotage themselves is with poor record keeping, said Kaufman Rossin accountant Meredith Tucker.
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Taxpayers forget about the charitable contributions they made midyear or legitimate business expenses. Digital apps such as Mint can help keep track of expenses and deductions, Tucker said.
Even a low-tech solution like a shoebox full of receipts can end up saving money, although some accountants will charge extra to sift through a mess of paperwork.
Deduct health care expenses: Americans are paying for more and more medical care out of their own pockets, about $800 per person per year, according to the latest data from the Health Care Cost Institute.
More of these health care costs could be turned into tax breaks. Pretax contributions to workplace flexible spending accounts (FSAs) or health savings accounts (HSAs) can be spent on medical expenses. Health care is also deductible on your tax return when it exceeds 10 percent of your annual income.
For those with lots of medical needs and some flexibility, it can make sense to bunch up your health care spending in one year.
Save on college tuition: The price of college keeps rising. The average cost of tuition and fees for a four-year public school was $18,943 this year, the College Board estimates, up 63 percent since 2000 even after adjusting for inflation.
A 529 college savings plan, an investment account that confers a tax break and allows money for tuition to grow tax-free, can help, but less than 3 percent of American families have a 529 plan, the Government Accountability Office estimates.
For parents in upper-income brackets, another strategy makes sense, said Greg Rosica, a tax partner at EY and an author of the EY Tax Guide 2015. Rather than selling investments to cover your children’s college tuition, you can give your children the appreciated stock, as much as $14,000 worth without triggering a gift tax. Have your kid sell the stock and pay tuition: His or her capital gains tax will be much lower than yours would be.
Use your retirement plan at work: About one in five workers doesn’t take advantage of 401(k) plans at work, the Center for Retirement Research estimates. These employees aren’t just missing out on tax breaks for retirement plans, they’re usually also forgoing a matching contribution from their employer.
Also, everyone, including the half of all private sector workers who don’t have a work retirement plan, can lower taxable income by contributing to a tax-deferred individual retirement account, or IRA.