Learn more about Craig on NerdWallet’s Ask an Advisor
Many different tax strategies can put cash in your pocket, and on the cusp of Tax Day, you may be wondering which ones can help you for next year’s filing. These “free money” ideas can brighten your financial picture.
Medical expenses are tax-deductible, but they are subject to what is known as a 10% floor, meaning that you can only deduct expenses that exceed 10% of your adjusted gross income. For example, if your adjusted gross income is $100,000 — 10% of which is $10,000 — and you had $12,000 in medical expenses, you could deduct $2,000.
In such a case, medical deductions have to be itemized, similar to deductions such as mortgage interest, property taxes, state taxes and charitable donations. In some cases, though, you can make your medical expenses tax-deductible without having to itemize and without having to meet the 10%-of-AGI rule by using health savings accounts.
Health savings accounts
Health savings accounts, which are tax-free savings accounts you can draw from to pay medical expenses, are a good idea if you have a high-deductible health insurance plan that requires you to pay a lot of money out of pocket before your insurance kicks in.
The beauty of this deduction is that you can take it whether you itemize or not. Further, you don’t have to use all of the money that you contribute to the HSA in any year for it to be deductible.
HSAs can save you plenty of cash. Here’s an example using figures for 2016: If you are single, with a minimum deductible of $1,300 and maximum annual out-of-pocket costs of $6,550, then you can contribute $3,350 into an HSA annually. That money is not counted as taxable income, so if you’re in a 15% tax bracket, your taxes would be lowered by roughly $500.
A family with a minimum deductible of $2,600 and maximum out-of-pocket costs of $13,100 can contribute $6,750 to an HSA, leading to about $1,000 in “free money” via lowered taxes.
When it comes to tax planning, it’s all about the hunt for tax credits. In fact, tax credits are more valuable than tax deductions. If you are in the 25% tax bracket, and you have a $10,000 tax deduction, that translates to about $2,500 in tax savings. If you have a $10,000 tax credit, however, that translates into $10,000. Tax credits are dollar-for-dollar against your liability.
You can receive tax credits for going back to school, sending your kids to college, saving money in a retirement plan, having children, paying for day care, making energy-efficient improvements to your home, converting to solar power, buying an electric car, and many other decisions.
Some tax credits can only be used to get rid of your tax liability. For instance, if you had a $4,000 tax liability and $5,000 in tax credits, you could only use $4,000 in tax credits to offset the liability. Most tax credits can only take your tax liability to zero.
However, other tax credits are refundable, meaning that if the credit is more than your liability, you will get the additional amount added to your refund. Refundable tax credits include the American Opportunities Credit, for certain expenses during the first four years of college, and the earned income credit, which is geared toward people who live at or below the poverty line.
As you can see, there is free money everywhere. Consult a tax accountant to find yours.