It’s tax time.
Wednesday brings the deadline for filing our 2014 federal and state returns. Regardless of whether you have filed or are still working to meet the deadline, it’s a good time to think about how personal finance decisions can affect our taxes, most importantly by reducing our tax burden.
The government provides incentives to make financial decisions that can help us and help lower our tax bills. They fall into three main categories: Retirement, health and home. Some options still may have benefits available if you haven’t yet filed your 2014 returns. All of them have benefits worth considering and discussing with your banker and tax adviser for the 2015 tax year and beyond.
Retirement: It makes sense for all of us to save for retirement, and our government leaders have determined that it makes sense to encourage us to do so. That’s why retirement savings can be tax advantaged for many, if not most, of us.
There are several vehicles for retirement savings, including participating in an employer-sponsored plan at work, often known as a 401(k). Employees can direct a portion of their paycheck into these funds, and many employers offer a match—free money—to workers who do. Another option is a self-managed plan such as an individual retirement account, or IRA, which you can open at your local community bank. While there’s no match, the tax savings can be significant.
My advice: start early and contribute regularly. Even small, regular contributions add up over time to a more secure financial future. And if you can lower your tax bill with these contributions, all the better.
Health: As with retirement savings, the government provides an incentive to put money aside in a Health Savings Account. HSAs operate much like regular savings or checking accounts, often with a debit card feature. They can be used for qualified out-of-pocket health-care expenses through the year.
In 2014, the maximum contribution to an HSA is $3,300 for an individual and $6,550 for a family. I say “is” because you can still contribute up to these amounts through Wednesday’s tax deadline and benefit on your 2014 returns. The limits increase to $3,350 for individuals and $6,650 for families in 2015. For both years, the government has sweetened the pot for individuals and families with an extra $1,000 exemption for those 55 and older.
We all pay out-of-pocket costs for health care, such as co-pays and other charges at the doctor or pharmacy not covered by health insurance. If we’re going to pay anyway, it makes sense to get the tax benefit through an HSA.
These accounts are easy to open at your bank. There are rules, however, including that you participate in a qualified health insurance plan. Ask your banker, your tax adviser or your insurance consultant for help. But consider an HSA if you haven’t opened one already.
Home: One of the biggest and oldest tax benefits is the deduction for mortgage interest. Home ownership remains the American dream for many. For decades, the government has given us a credit on our taxes for a major cost of achieving that dream, the interest payments on our mortgages.
Buying a home involves much more than a tax strategy, of course. But if you are in the market, it makes the decision to proceed even more attractive. What’s more, there are ways to use your home to consolidate other debt and to benefit from tax savings. Each case is different. But it’s worth talking with your banker and tax adviser to see if the mortgage interest tax deduction can help in ways you might not have considered.
The government has provided tax incentives for making sound financial decisions, especially involving retirement, health and home. Tax season is the perfect time to consider them to make sure you benefit fully.
Dale Lewis is president and CEO of Park State Bank in Duluth. You can reach her at firstname.lastname@example.org or 218-722-3500.