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Last-Minute Tax Moves You Need to Know

Taxpayers get extra days to file

tax time concept clock, Last-Minute Tax Moves You Need to Know

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Taxpayers in 48 states get an extra three days to file their federal tax returns.

This is a good year for procrastinators.

Because of Emancipation Day this month in Washington, D.C. — the home of the IRS — taxpayers in 48 states get an extra three days, or until April 18, to file their federal tax returns. And Maine and Massachusetts celebrate another lesser-known holiday — Patriots Day — on Monday, so residents there don’t have to file returns until April 19.

But these new deadlines are just around the corner, and even procrastinators need to get cracking on their returns. In your last-minute rush, though, don’t overlook tax breaks or make mistakes. Here are some reminders to prevent that:

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Contribute to a traditional IRA. This is one of the few ways at this late stage to lower your tax bill. Contributions to IRAs for 2015 can be made up until the tax deadline. Workers can contribute up to $5,500 to an IRA — or $6,500 if they’re 50 or older.

If you don’t have a retirement plan at work, your entire contribution to a traditional IRA is deductible. If you have a plan, you can deduct all or some of your contribution if you are single and your income was less than $71,000 last year. For married joint filers, that income limit is less than $118,000.

Don’t overlook a Roth IRA if you think you will be in a higher tax bracket later in life. A Roth contribution doesn’t offer an upfront deduction. But your contributions and any investment gains in the account can be withdrawn free of tax later by you in retirement — or by your heirs. Income limits apply.

Fund a health savings account. You also can lower your tax bill by making a 2015 contribution to a health savings account by the tax deadline. This account is paired with a high-deductible health plan and allows you to invest money before taxes are taken out. The money can later be withdrawn tax-free to pay qualified medical expenses. For 2015, you can invest up to $3,350 in a health savings account, plus an extra $1,000 if age 55 or older.

For instance, if you rented out a room or house for more than 14 days during last year, you must follow the tax rules for rental property owners, says H&R Block. The good news: A portion of your mortgage interest, real estate taxes and expenses maintaining the rental property may be deductible depending on how many days you stayed there.

Meanwhile, Uber and Lyft drivers are usually considered self-employed and subject to 15.3 percent self-employment tax to cover Social Security and Medicare taxes, H&R Block says. The drivers, though, can deduct expenses such as gas, repairs and vehicle licenses.

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Choose the sales or state income tax deduction. A federal tax break involving state sales taxes had expired but was recently revived and made permanent by Congress. It allows taxpayers to deduct the state and local sales taxes they paid during the year on their federal returns instead of the amount they paid in state and local income taxes. Being able to deduct sales tax benefits residents in states without an income tax to deduct —Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

But even if you don’t live in one of those states, deducting sales tax may make sense if you made a big purchase last year and paid more in state sales tax than in income tax.

Please see item 7 on the individual taxpayer info on this release.

Take medical deductions. Did your income drop last year, perhaps because you retired? If so, you may find that you now can deduct your medical expenses, says Kathy Pickering, executive director of the Tax Institute at H&R Block. Medical expenses above 7.5 percent of adjusted gross income are tax deductible for those 65 or older. (For those younger, medical expenses must reach above 10 percent of AGI to be deductible — a more difficult threshold to meet.)

Earned income tax credit. This often overlooked tax credit is available to lower-income taxpayers with earnings from a job or self-employment.

“Roughly, 20 percent of eligible taxpayers do not take that credit,” Pickering says. “It may be that they just don’t understand it or don’t think it applies to them.”

The size of the credit is based on income and number of children, and ranges from a maximum of $503 for singles with no children to $6,242 for taxpayers with three or more kids. It phases out once income reaches $14,820 for singles with no kids, and $53,267 for married joint filers with three or more children.

The credit will reduce any tax you owe dollar-for-dollar. And if you owe less than the amount of the credit, you’ll get the difference in the form of a refund.

Not only that, about half of states have their own earned income tax credit, and the combined credits can significantly boost your income.

Use the correct filing status. A common mistake is to use the wrong filing status, which may be single, head of household and married filing jointly or separately. Some filers in the midst of a divorce might not be sure which status to use, and that can affect their tax liability, Pickering says. Deductions tend to be more favorable for married joint filers than those filing separately, she says. Your filing status is whatever your situation was at the end of 2015, she says.

Be on the lookout for new documents. Many people this year will get a new document to verify that they have had health insurance in the past year — a requirement under the Affordable Care Act. You might, for instance, receive a 1095-C from a large employer or a 1095-B from an insurer or small employer. (People buying insurance through one of the state-sponsored health care exchanges started receiving a 1095-A form last year.)

You don’t need to include these documents with your return, but make sure you keep them with your records in case you’re ever audited, says Mark Luscombe, principal federal tax analyst with Wolters Kluwer Tax & Accounting.

File for free. If your income is below $62,000, you can use free tax preparation software offered by companies under the IRS Free File program.

Get more time.  If the extra three or four days to file this year isn’t enough to get your taxes done, file Form 4868 to get an automatic six-month extension to file until Oct. 17. You must file that form, though, by April 18. (April 19 for taxpayers in Maine and Massachusetts. But an extension to file your tax return doesn’t give you more time to pay your taxes. Estimate your tax liability and make sure you pay it by the April deadline. If you will have trouble paying, check out the IRS for payment options. For instance, those owing $50,000 or less may be able to pay in installments.

Pay with cash. Now you can pay your tax bill while waiting for your Slurpee. New this year, the IRS is accepting cash payments at more than 7,000 7-Eleven stores in 34 states. The fee for this service is $3.99 per payment.

 

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