Stretch an extra September paycheck into a bigger April refund
With five Fridays this month, employees with a biweekly pay schedule and Friday payday will receive three paychecks this September. And if their employer deducts their benefits on a semi-monthly schedule, that third paycheck will be larger than their regular paycheck. The good news doesn’t end there: employees can put this additional paycheck to work for them and doubly benefit by lowering their tax liability and possibly increasing their income tax refund.
1. Make an extra student loan payment
Taxpayers can deduct up to $2,500 of interest paid on their student loans each year, even if the payment is voluntary. The more interest paid, the larger the deduction taxpayers can claim up to the maximum. Because this deduction does not require a taxpayer to itemize their deductions, any eligible taxpayer can take it. And because it is taken above the line, it will reduce a taxpayer’s adjusted gross income. However, income and filing status restrictions, as well as other loan and borrower information, will prohibit some taxpayers from claiming this deduction.
2. Give to a charity
Taxpayers who itemize their deductions, or are close to surpassing the standard deduction could make a charitable contribution. In addition to helping their favorite charities, the contribution lowers the taxpayer’s own tax liability. For example, a taxpayer with a marginal tax rate of 25 percent could save $25 in taxes for every eligible $100 donation. Taxpayers must give to eligible charities if they want to deduct their contribution. Taxpayers can use the IRS online tool to search for charities’ eligibility. Taxpayers need to keep appropriate documentation for all contributions.
3. Contribute to an IRA
Taxpayers can deduct up to $5,500 contributed to a traditional IRA. However, the contribution may not be fully deductible if eligible to contribute to a retirement plan through an employer. Those who cannot make a deductible contribution should consider a Roth IRA. Contributions are never deductible but qualified distributions are tax free. Both traditional and Roth contributions are subject to income and other restrictions.
By using these three strategies, not only can employees get ahead on some payments and investments, but by doing so, they may stretch their third September paycheck into a bigger April refund.
Itemizing charitable donations is a strategy to reduce taxable income, but there could be better ways to get a tax benefit for your charitable donations
Major life changes like getting married can bring big tax changes for you. Learn about the different filing options and deductions from the tax experts at H&R Block.