I talk to people about money every week, and in April many of the conversations I’m having are about taxes. Long story short, people are not very happy this year. It seems everyone I talk to – from my college-aged daughter to the most successful business owners – are simply not pleased.
I think in many ways we had been lulled in complacency regarding federal income taxes. But with the expiration of what was commonly referred to as the “Bush tax cuts” at the same time as the Obama stimulus inspired Social Security tax reduction, federal taxes have become considerably less comfortable for families at all ends of the income spectrum.
The lower tax rates of the 2001-12 period (Bush tax cuts) and the Social Security or “payroll” tax break both expired at the end of 2012. In my opinion, the most radical changes resulting from this were the elimination of the 10 percent tax bracket at the low end of the income scale (it was folded into the 15 percent) and the almost 35 percent increase in the payroll tax rate. These two items together were enough for many people on the lower end of the income scale to see their refunds turn into tax bills.
I have to say, it’s pretty irritating to owe more on your return than you planned for, but it’s another thing entirely when the refund you were counting on turns into a tax bill. Not a good day.
So let’s talk about a few last-minute tax savings tips and maybe we can find a little relief.
A last minute IRA contribution could be the fastest way to get a little tax relief. The rules for IRAs are unfortunately not as simple as they could be, but many of us are eligible to put up to $5,500 into a Traditional IRA ($6,500 for those older than 50). A maximized IRA contribution may be able to take about $1,000 off your tax bill and can be made until April 15 for 2013.
A poorly understood and often overlooked tax deduction can come from medical expenses. Medical expenses are deductible to the extent they exceed 10 percent of income (7.5 percent for those over 65). The definition of medical expenses is broad and can include chiropractic care, contact lenses or glasses, dental fees, lodging expenses incurred while receiving care and a long list of other things.
The same 10 percent guideline also applies to out of pocket losses from casualty or theft. Items on this list can include auto accident deductibles, fire and storm damage and replacement of trees and shrubs due to extreme weather.
Charitable contributions, of course, needed to be made during 2013 to be deductible on the 2013 return, but did you know out of pocket expenses incurred while engaged in volunteer activities may also be deductible? Make sure your records are good and the expenses are reasonable.
Your tax adviser won’t know about things you don’t bring up, so be creative and curious and you just might save some money yet.