Politicians are always promising to completely revamp the tax code, but on the whole, our current tax policy has remained stubbornly consistent, with only minor changes over the years. Likewise, smart tax strategies will stand the test of time. As tax season bears down upon us, here are some reliable and long-term tax strategies that will help you get as many tax breaks as possible. It may be too late to use these strategies for this year’s taxes, but certainly you can start applying them now to enjoy the benefits next year.
Max Out Your Retirement Account Contributions
According to the US Department of Labor, 39% of female workers are covered by private pension plans, compared with 46% of male workers. And when retirement time comes, 32% of female retirees get pension benefits, compared with 55% of men. Add to that the sad fact that a woman still earns only 76 cents for every dollar a man earns, and the conclusion is obvious: we’re just going to have to handle this ourselves. How? Contribute, contribute, contribute!
Fortunately, the IRS has made it easier to build a successful retirement stash. Each year the deductible amount you can contribute to a retirement account is increased for inflation, and there are catch-up contributions for those 50 or over. Do the best you can to contribute the maximum deductible amount so that this money can grow tax-free until you reach retirement. The IRS can’t save for you — the rest is up to you.
Start Saving for College Costs
Women face a double whammy when saving for our children’s education. How can you pay for the $100 sneakers now and still set aside enough money to pay the staggering cost for college later?
Section 529 plans allow taxpayers to set aside money to grow tax-deferred, which can be taken out tax-free to pay educational expenses. This means that your money grows without taxation every year, and you don’t pay taxes when it comes out, either (It’s Never too late to Save for College).
Parents, grandparents, or anyone else who meets the applicable income restrictions may also contribute up to $2,000 per child per year to a Coverdell Education Savings Account (ESA). Children can also contribute to their own accounts. These accounts can be used to pay for private elementary and secondary school expenses as well as college expenses.
There’s hope — the Hope Credit, now renamed the American Opportunity Tax Credit that is. It amounts to 100% of the first $2,000 of a college student’s annual tuition and fees (no room and board costs) plus 25% of the next $2,000. So the maximum credit is $2,500 per qualifying student per year. The American Opportunity Tax Credit can be claimed for four years for any one student and it is allowed only when the student carries at least half of a full-time load for at least one academic period during the year.
The Lifetime Learning Credit is less restrictive. This credit is available for an unlimited number of years and without any requirement to carry a certain course load. You can also get credit for graduate courses and non-degree courses, such as professional training seminars and courses to update your computer skills. The credit is up to $2,000 per student for all qualified education expenses.
Eligible taxpayers can also deduct up to $4,000 in education expenses “above the line” (meaning you need not itemize to get the break), subject to income limitations. By the way, if you are considering going back to school yourself, keep in mind that your employer can reimburse your tuition up to $5,250 tax-free. Graduate school courses can be covered in addition to undergraduate courses.
Take All the Deductions You Can for Your Children
From diapers to piano lessons to all the extra food you need to stock for growing bodies, children are expensive! Fortunately, the government gives you a few financial tax breaks for being a parent. Make sure you take advantage of all of them! First off, there’s the $1,000 tax credit for each qualifying child, in addition to each dependent’s personal exemption. Don’t forget to take this credit-it’s like receiving $1000 tax-free in your pocket, as long as your income doesn’t exceed the limitations.
The child and dependent care credit will cover up to $3,000 of qualifying expenses if you pay a babysitter or daycare center so you can work or go to school. If you have two or more qualifying dependents, you can claim the credit for up to $6,000 of expenses. For all but very low-income taxpayers, the new rules translate into a maximum $1,050 annual credit for one qualifying dependent or $2,100 for two or more dependents.
If you have your own business, you can employ your kids at a fair-market wage and deduct your payments to them — which is more than you can say for an allowance! You can also help them to get started on their own savings by setting up IRAs for them for $5,500 per year or up to their earned income, whichever is less.
We women are savvy and resourceful. Using the tax strategies above can help next year’s April be a little bit sweeter than this year.
Need help with taxes this year? Check out the other great articles in our tax article archive for advice that can help you save big!