We are a month into 2017 and now that the excitement of the new year has worn off, it’s time to set a proper plan in place for 2016’s most dreaded wrap-up project: taxes. Although the IRS has already started accepting 2016 returns, in my experience as an economist, I have found that many people delay thinking about taxes. Instead, I am encouraging everyone to not only get an early start on their taxes, but also to check and double check how much they will be paying out or looking to get back this year.
In order to make sure I was paying the right amount in taxes each year, I realized that I need to reframe the way I think about taxes by asking myself, “Am I paying my fair share of taxes, or am I loaning the government interest-free money by paying too much in taxes each paycheck?” When you allow the IRS to deduct more from your paycheck than is necessary in the hopes of getting a nice, sizable tax return, you are in fact loaning the government interest-free money. An important distinction to understand is that getting money back at the end of the year is not a “benefit.” A tax refund is not a gift: You are simply receiving your hard-earned money back. It means you gave the government more money than you were meant to. Would you pay your landlord an extra $200 per month, just to get $2,400 back at the end of the year and think, “Wow! I’m getting money back!”
One way to make sure you’re paying the right amount in taxes is to check that you are properly categorizing yourself for tax purposes. This means carefully updating your W-4 form if you got married, had children, or if you became the primary breadwinner of your house last year. Another way to be sure that you are paying the right amount in taxes, of course, is to reach out to a seasoned tax professional or to check your work on a withholding calculator. Finally, there are online or app resources that can help you do your taxes. If you drive frequently for work, MileIQ is an interesting new tool for tracking your mileage for deductions and/or expensing them to your employer. There are also receipt-managing apps if you’re tracking expenses, like ShoeBoxed. When it comes to the numbers game of deductions, adequate documentation is crucial.
The other clear way to make sure you’re paying an appropriate amount (and/or getting an appropriate amount back) in taxes is to take advantage of applicable deductions. Here are eight relatively uncommon deductions that many taxpayers qualify for, but fail to use as deductions. More information about each can be found on the official IRS website.
- Out-of-pocket charitable donations. Whether you have a cause that you contribute to monthly or you were inspired to make a one-time donation to the ACLU in light of current events, the deductions from giving out-of-pocket funds and in-kind donations to charitable organizations can add up. While that was probably not on your mind as a reason to give, it certainly is an added benefit if taken advantage of. A well-reviewed mobile app that can help you keep track of donated items is ItsDeductible.
- Moving expenses. If you moved in the last year for work, you could be sitting on top of a large tax deduction. Basic criteria: If you moved more than 50 miles to start a new job, then the IRS will let you deduct a portion of your moving expenses.
- Tuition and student loan deductions.By deducting your tuition and related fees, you can lower your amount of taxable income by up to $4,000.Qualified tuition expenses paid for yourself, your spouse, or your dependents can add up to major tax savings come filing time. Furthermore, if you’re paying off student loans, a portion of the interest may be deductible on your taxes.
- Tax preparation fees.This is a really awesome deduction, because many of us outsource our tax preparation to a third party (i.e., an accountant). Some of this cost can actually be deducted. It is a win-win since it allows for you to have greater confidence that your taxes are being prepared correctly, and you can deduct a certain amount of your fees for taking this step.
- Job search expenses. While job searching expenses aren’t fully deductible, if you looked for a job in your chosen occupation during the last year, a portion of those costs can be deducted. Things such as résumé preparation costs, travel expenses, and placement agency fees can all receive deductions. If you are searching for your first job or first job in a new occupation, those costs cannot be deducted.
- State and local sales tax. According to the IRS, “you can elect to deduct state and local general sales tax instead of state and local income tax.” This is most useful if you purchased an expensive item in the last year, such as a car, boat, etc.
- Work uniform costs. This one is really helpful for healthcare professionals. A deduction can be filed for both the cost and upkeep of work uniforms. There is a set of criteria that must be met, such as the uniform must be a requirement for your employment.
- Energy-saving home improvements. A portion of the costs to make your home more energy efficient may be tax deductible. This can range from small items, such as light bulbs, to larger investments, such as appliances, windows, and water heaters.