April 15 falls on a Saturday this year, so you have three extra days—until April 18—to file your 2016 tax return. That’s three extra days to look for another deduction or credit!
Some of the most popular (and valuable) tax breaks are listed below. As you look for opportunities to save,keep in mind that in most instances, a tax credit is more valuable than a tax deduction.Tax deductions lower the amount of income that is taxed, while tax credits reduce the amount of tax you owe dollar-for-dollar.
In most instances, your eligibility depends on your income and other personal circumstances. Because the tax code is complex, I recommend consulting with a tax professional before spending any hypothetical savings.
1. American Opportunity Tax Credit
If you’re paying for college tuition, books, and other required fees for yourself, your spouse, or a student who is your dependent, and you meet the income limits, you may qualify for the American Opportunity Tax Credit on costs associated with the first four years of higher education.
- Married taxpayers filing jointly and making up to $160,000 in modified adjusted gross income (MAGI*) can qualify for the full credit. The amount of the credit is phased out (or gradually reduced) for married filers with MAGI between $160,000 and $180,000, and joint filers can’t claim the credit if their income is more than $180,000.
- Single filers making up to $80,000 in MAGI can qualify for the full credit. The amount of the credit is phased out (or gradually reduced) for single filers with MAGI between $80,000 and $90,000, and single filers can’t claim the credit if their income is more than $90,000.
- The education credit is equal to 100% of the first $2,000 of qualified education expenses you paid for each eligible student in 2016 and 25% of the next $2,000 of qualified education expenses you paid for that student.
- This credit is “partially refundable,” which means that if the credit reduces the amount of tax you owe to zero, you can still get 40% of the credit as a refund, up to $1,000 maximum, according to the IRS.
*MAGI is adjusted gross income with certain deductions, such as foreign income and student loan interest, added back.
2. Individual retirement account (IRA)
Even if you and your spouse are participating in an employer-sponsored retirement plan, you can still save on taxes (and boost your retirement savings) by contributing to a traditional IRA, provided your income falls within the 2016 limits shown below.
Single or head of household:
- Your contribution is fully deductible up to the amount of your contribution if your MAGI is $61,000 or less.
- Your contribution is partially deductible if your MAGI is more than $61,000, but less than $71,000.
- Your contribution is not deductible if your MAGI is $71,000 or more.
Married filing jointly or qualifying widow or widower:
- Your contribution is fully deductible up to the amount of your contribution if your MAGI is $98,000 or less.
- Your contribution is partially deductible if your MAGI is more than $98,000, but less than $118,000.
- Your contribution is not deductible if your MAGI is $118,000 or more.
The maximum IRA contribution is $5,500, or $6,500 if you were age 50 or older in 2016.
3. Saver’s Credit
The Saver’s Credit returns up to 10% to 50% of the first $2,000 contributed to an IRA or 401(k), provided you meet certain income limits.
For 2016, a married couple filing jointly and earning less than $61,500 can qualify for at least a partial credit. The maximum credit is $2,000 for a married couple filing jointly.
For 2016, single taxpayers making less than $30,750 can qualify for at least a partial credit. The maximum credit is $1,000 for an individual.
Other restrictions apply. The Saver’s Credit can’t be claimed by:
- Taxpayers under age 18.
- Students (defined as someone enrolled full-time during any part of five calendar months during the year).
- Anyone claimed as a dependent on someone else’s tax return.
4. Child and Dependent Care Credit
This credit reimburses you for work-related child-care costs for children under the age of 13. It offers a maximum credit of $3,000 for one child and $6,000 for two or more children (the exact amount depends on your child-care expenses and how much you earned in 2016).
- You can claim this credit for older children or adult dependents who are unable to care for themselves or who live with you for at least half of the year.
- The care provider can’t be a member of your immediate family, such as a spouse, parent, or your dependent.
- The Child and Dependent Care Credit is nonrefundable. This means that, although it can lower the taxes you owe, you wouldn’t get a refund if the credit is greater than the total federal tax you owe.
5. Energy tax credits
There are two energy-related tax credits, the Residential Energy Efficient Property Credit and the Non-Business Energy Property Credit.
Residential Energy Efficient Property Credit:
- You can claim this credit to help offset the cost of home improvements (such as the installation of solar panels, wind turbines, or geothermal heat pumps) that generate alternative energy in your principal residence or second home.
- The credit is equal to 30% of the cost of the equipment, including installation.
Non-Business Energy Property Credit:
- This credit applies to qualified energy efficiency improvements (such as home insulation and replacing exterior doors and windows) and residential energy property costs (like electric heat pumps, central air conditioning, or furnaces).
- You can claim a tax credit for 10% of the cost of these improvements, including the cost of installation; however, significant limits can apply. For instance, you can only claim a total of $500 for all years combined (2006 to present). The maximum total credit for exterior windows is $200, and you can only claim up to $150 for a furnace or boiler.
6. Job-seeking expenses
If you looked for a new job in 2016, you may be able to deduct some of the expenses involved, including for the preparation of a resume, travel expenses, and employment agency fees. You can’t deduct expenses if you were searching for your first job, or for a job in a new occupation.
7. Moving expenses related to a job change
If you moved 50 miles or more to take a new job in your current line of work (and if you meet certain other requirements set by the IRS) in 2016, you may be able to deduct the expenses involved. You can’t deduct moving expenses covered by reimbursements from your employer that were excluded from income.
8. Earned Income Tax Credit
The Earned Income Tax Credit refunds tax payments to low- or moderate-income families. To qualify, you must file a tax return—even if you owe no taxes and otherwise don’t have to file.
- Eligibility is determined by a number of factors, including your income, the number of children in your family, and your tax filing status.
- In 2016, a single filer with three or more children who makes less than $47,955 in adjusted gross income could receive a maximum credit of $6,269.
- In 2016, married filers with three children and less than $53,505 in adjusted gross income could receive a maximum credit of $6,269.
- If you qualify for the federal Earned Income Tax Credit, you may also qualify for a state or local credit. More than 20 states plus a few localities offer a similar benefit.
Comedian Bill Murray said, “The best way to teach your kids about taxes is by eating 30% of their ice cream.” Here’s hoping that one or more of these tax breaks saves a scoop or two.
The information provided here is for educational purposes only and isn’t intended to be construed as legal or tax advice. We recommend that you consult a tax or financial advisor about your individual situation.