We’re down to the last few weeks before April 15, the day more commonly known as “tax day,” among a few other colorful descriptions that are best not printed.
If you haven’t filed your tax return yet, chances are good that you’re not expecting a big refund. But it’s not too late to do a little last minute tax planning, and you might be surprised by how much a few tax tips can lower your tax bill or — hope springs eternal — actually secure a decent-sized refund.
Let’s take a look at some tax tips that can keep a little more cash in your pocket this April:
Contribute to an IRA or HSA Plan
I’ll start with one that is tried and true—contributing to an IRA or HSA plan.
For tax year 2013, you can contribute $5,500 to an IRA or Roth IRA and $6,500 to either if you are age 50 or older. The Roth IRA, as a general rule, is a better long-term financial planning vehicle. But if you’re looking to take a dent out of your tax bill today, you’ll want to contribute to a traditional IRA, as the Roth offers no tax break in the year of the contribution.
How much can you save by making a contribution? It depends on your tax bracket, but let’s consider an example. If you’re filing as a married couple with a combined income between $72,501 and $146,400, you fall in the 25% marginal tax bracket. Contributing $5,500 will mean $1,375 in tax savings. Contributing a combined $11,000 will save you $2,750.
The same goes for Health Savings Account (HSA) contributions. If you buy your own health insurance and it is HSA-compatible, an HSA can be thought of as something like a “spillover” retirement account if you have already maxed out your IRA or 401k. And unlike IRAs — in which your ability to take a deduction can be phased out or eliminated if you already contribute to an employer 401k plan — HSA accounts have so such conditions.
In 2013, an individual policyholder can contribute a maximum of $3,250 to an HSA, and a family can contribute $6,450.
Though hardly a revolutionary idea, parking cash in an IRA or HSA is a last-minute tax tip that works.
Investment Advisor Fees
Next on the list are investment advisor fees. If you manage your own investments exclusively, then there isn’t much you can do here. And if you use the services of a broker who charges a sales commission on the stocks or mutual funds you buy, those are not deductible (though they do affect your cost basis and thus have an effect on any capital gains taxes you pay down the road).
If you use a fee-based advisor, however, you might be in luck. Advisory fees paid to your financial advisor are indeed deductible.
There are a couple things to keep in mind though. In order to write off any investment advisory fees, you have to itemize. Often, if you have a home mortgage, you will pay enough in mortgage interest and other home-related expenses to surpass the standard deduction. In 2013, that amounts to $6,100 for an individual or $12,200 for a couple filing jointly. Additionally, your deductions here are generally limited to the amount of expenses over and above 2% of your adjusted gross income.
One major word of caution. While the deductibility of investment advisor fees is unquestionably deductible for taxable accounts, it gets a little murky with IRA accounts. Paying your investment advisor out of your IRA is not considered a taxable distribution. But you can’t claim the fees paid as a deduction. You can, however, claim the deduction if you pay your fees with outside money. In practice, this will mean either writing your advisor a check or having them deduct the fees for managing your IRA from a separate, taxable account.
If you subscribe to paid financial newsletters, newspapers, or magazines, these too can be considered “investment related expenses” as well if you can credibly say that you use the publications to generate investment income.
This won’t be a large deduction for most people. Most subscription services cost, at most, a couple hundred dollars. Still, there is no reason not to take advantage of the tax break if these are expenses you were going to make anyway. And for some avid investors with subscriptions to multiple publications and high-end advisory services, the deduction could conceivably be worth a couple thousand dollars.
Keep good records of your subscription purchases because, as a general rule, large itemized deductions make great audit targets for the IRS. And naturally, you should use common sense here. If you don’t feel you can credibly explain to an IRS auditor that you need a given publication—such as your Sunday newspaper—to make investment decisions, you should err on the side of caution and leave those expenses off your tax return.
Child Care Expenses
Next on this list of tax tips are child care expenses. If you have kids and you pay for daycare, mother’s day out or for the services of a nanny, tally up what you paid in 2013. It could give you a nice tax credit.
The Child and Dependent Care Credit can seem a little complicated at first, but I can sum it up like this. If you pay for childcare expenses so you can work outside the home, $3,000 in expenses for the first child (or a total of $6,000 in expenses for two or more children) can be used to calculate the credit. The $3,000 (or $6,000) is multiplied by a factor that varies by income. For example, if your household’s adjusted gross income is more than $43,000, the factor is 0.2. (Don’t worry, popular tax programs such as TurboTax will make these calculations for you.) The factor is greater the less your income is, meaning that lower-income families get a larger credit.
So, for a family with two or more dependent kids, the tax credit would be calculated as $6,000 * 0.2 = $1,200.
It’s not uncommon for parents to pay tens of thousands of dollars in child care expense, so it can be frustrating that the amount used in the credit calculation is capped at $6,000. Still, a $1,200 reduction in your tax bill is nothing to laugh off, particularly considering that you were going to be making these expenses anyway.
A few things to note: To qualify, your kids must be under age 13, and the expenses must legitimately be used to allow a parent to return to work. For example, if a family has a stay-at-home mom who is not gainfully employed, they would not be able to apply any preschool or early development classes to the credit.
Also, only expenses you pay for yourself are eligible for the credit. Employer-provider care actually reduces the credit, though it also reduces your taxable income. If you have any doubts, talk to your CPA.
Check for Donations
For one final last-minute tax tip, dig through your bank statements and receipts for any donations you made to charities last year. Whether it was a check you left in the offering plate on Sunday or a gift you gave to your university or the local homeless shelter, taken in total, they could amount to a good-sized deduction.
Remember: To write off any charitable contributions, you have to itemize. Often, if you have a home mortgage, you will pay enough in mortgage interest and other home-related expenses to surpass the standard deduction. In 2013, that amounts to $6,100 for an individual or $12,200 for a couple filing jointly.
It’s also important to keep good records. Larger charities will usually send you a statement at the end of the year summarizing your donations. But smaller charities often won’t, so you’ll want to keep a copy of your bank or credit card statement or a receipt.
Cash donations are pretty straightforward, as are donations of stock or other items with a listed market value. Donations of clothes or personal items can get a lot more complicated because the “value” of the items in question can be somewhat subjective. TurboTax and other mainstream tax programs will offer guidance, but as a note for the future, I recommend taking a photo of any clothes or personal items donated to keep for your records. In the event you are audited, they can add support to your estimated values.
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