Tax season is underway, but it’s not too late to lower your income tax payments. Local financial planners and tax preparers say there are still steps you can take to cut your taxes and increase your refund.
The first place to start is reducing your taxable income, tax specialists said. An easy way to do that is to contribute to an Individual Retirement Account, or IRA. You have until April 15 to create a new IRA account or make contributions to an existing one.
The contribution limit for 2012 is $5,000 for those under 50. Investors 50 and older can contribute up to $6,000 annually. Some taxpayers can take a deduction for the entire amount of their contribution, but restrictions apply.
If a taxpayer or spouse has a 401(k) or other employer-sponsored retirement plan, and the couple has an adjusted gross income over $92,000, the IRA deduction is reduced. It continues to phase out until income reaches $112,000, when the deduction disappears entirely.
For single filers, the deduction begins falling at $58,000 and phases out completely at $68,000.
“But if there’s no 401(k) at all, it is fair game,” said Greg Stevens, senior financial counselor at Cabot Money Management in Salem. “You could make $1 million a year and you could take the full deduction.”
An additional tax credit — up to $2,000 for married couples — may be available for low- and moderate-income investors who made contributions to a retirement account. Money contributed to a Roth or traditional IRA, or an employer-sponsored plan such as a 401(k) can qualify for the deduction. Single filers with incomes of up to $28,750 and married couples making up to $57,500 may be eligible for the credit.
People who participate in the less common SEP or SIMPLE plans — generally the self-employed or those who work for small businesses — might have even more time to make a contribution to their accounts, with some limitations. Taxpayers who request an extension on their filing date can contribute to these plans until their new deadline, generally Oct. 15, said Grafton “Cap” Willey, a managing director at CBIZ Tofias in Boston.
Investors can contribute up to 25 percent of their income to a SEP plan, up to $50,000. Self-employed taxpayers who contribute to a SIMPLE plan — though not small business employees in similar plans — can also take advantage of an extension to add money to their account. The annual contribution limit is $11,500 for those under 50 and $14,000 for those over.
Taxpayers who itemize deductions should also keep their eyes open for a few commonly overlooked chances to trim their taxable income.
If eligible, homeowners should make sure they are taking the proper deduction for mortgage insurance payments, said Doreen Breland, client service leader for H&R Block in Stoneham. The cost of the insurance, which protects lenders against losses if a homeowner can’t make mortgage payments, may be deductible, but lenders don’t always include the information on the year-end tax documents they send, she said.
Premiums paid on insurance issued in 2007 or after qualify for the deduction, but there are income limitations. Married filers with adjusted gross incomes over $109,000 and single homeowners with incomes over $54,500 are not eligible for the credit.
With high unemployment reducing family income and rising health care costs, more people may want to be aware of the deduction for medical expenses, Stevens said. Taxpayers can only claim the deduction if they spend at least 7.5 percent of adjusted gross income on medical care, but if they qualify, it can result in significant tax savings.
Taxpayers who are going to school or paying a dependent’s college tuition might be able to claim some higher education costs to lower their tax bill. But they will have to choose between taking the tuition and fees deduction or the American Opportunity tax credit.
The deduction can reduce taxable income by up to $4,000; the credit can reduce the amount of taxes owed by up to $2,500. The best way to choose? Calculate your taxes both ways and see which is better.
People who don’t intend to file a return because they don’t owe taxes should determine whether they are eligible for a refundable tax credit, meaning the money can be claimed even if no taxes are owed, Breland said. The American Opportunity credit is one such possibility.
Also refundable is the Earned Income Credit, which is aimed at helping low-income, working households. A single filer with no children must have an income less than $13,980 to qualify and could receive a refund of up to $475; a married couple with two children could receive a refund of as much as $5,236 if their income is less than $41,952.
Other ways to trim your tax bill range from the obvious — charitable deductions — to the obscure — business expenses for performing artists. So, to make sure you are getting all you can, keep track of all expenses and seek professional help when needed, tax preparers advised. “The real trick to all of this is to keep receipts like crazy,” said Cyndie Barone, a financial planner and tax preparer in Waltham. “If you are not sure, let an experienced tax person tell you.”