Although it’s not exactly uncommon to have five Fridays, Saturdays and Sundays in a single month, it does mean that employees with a biweekly paycheck will receive a third paycheck this August. 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 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, anyone 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. Make an extra mortgage payment Homeowners can deduct all the mortgage interest – and possibly some points and fees – paid on their primary home and a second home if they don’t rent it out. Making an extra payment will further increase the deduction. Even if a homeowner faces prepayment penalties for doing so, those penalties are deductible as interest too. Unlike the student loan interest deduction, the mortgage interest deduction requires filers to itemize.
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 August paycheck into a bigger April refund.