KEYC - Top 11 ways to cut your taxes this year

Top 11 ways to cut your taxes this year



Taxes again? Didn't we just give the government tax money last year?

Indeed we did, as we do every year. However, you can give the government less of your money by taking advantage of all the legal tax savings for which you qualify. Here are 11 of the finest ways to hang onto more of your cash in the new tax year.

1. Maximize Retirement Plans Your greatest tax deferral may come from maximizing contributions to your IRA or 401(k) up to the limits. For the 2017 and 2018 tax years, IRA contribution limits are $5,500 with an extra $1,000 catch-up contribution if you are at least fifty years old, while 401(k) limits for 2017 and 2018 are $18,000 and $18,500, respectively, with a $6,000 catch-up contribution limit for each year.

Contributions to IRAs made before April 17, 2018, can be applied to the 2017 tax year as long as you stay below the total annual limits.

2. Itemize Deductions Do not just assume the standard deduction works best for you. There is a wide range of tax deductions available to you, and they may well add up to tax savings if you properly document and submit them. See IRS Form 1040 Schedule A to look over the possibilities. Do not forget to save the necessary corresponding receipts. The Tax Cuts and Jobs Act (TCJA) has eliminated many itemized deductions, beginning in tax year 2018. Make the most of these deductions this tax season, while you still can. The standard deduction will increase dramatically in 2018 to $12,000 for single filers and $24,000 for married couples filing jointly.

3. Stay Informed Tax changes come and go every year, but the recent TCJA is the largest tax overhaul since 1986. Stay tuned to the news for any last-minute changes in the tax law that you could use to your advantage, such as the new two-year budget deal that President Trump signed in February.

4. Hunt for Tax Credits Tax credits are more powerful than deductions, since they are subtracted directly off your tax bill instead of reducing your taxable income. Many tax credits, such as the Earned Income Tax Credit, are targeted toward taxpayers with lower incomes.

5. Make an Educational Investment By investing in a state 529 program or similar college savings program, you can help your money grow, tax-free, as long as the funds are used for valid educational expenses. Since these programs are established with after-tax dollars, they will not save you money this year on Federal taxes, but many states allow you to take deductions or credits on your state tax return. The TCJA now allows families to use 529 plan funds towards not only college expenses, but also elementary and high school costs at private schools including those with religious affiliations.

6. Take Advantage of Capital Gains Long-term capital gains are taxed at a lower rate, so take advantage of them at every opportunity for example, by reinvesting dividends or selling losing stocks to offset capital gains for tax purposes. Losing stocks should be sold before the end of the year to take advantage in that particular year. Consulting a tax professional or online financial advisor may be useful here. Explains Betterment Head of Tax Eric Bronnenkant, "With your taxable investment, what we call a Non-Retirement Account, Betterment offers something called Tax Loss Harvesting, to make sure that we're capturing any losses that exist, to use against other gains that you might have in any given year." The TCJA has kept the general structure of capital gains tax system the same, but the top tax bracket has been lowered to 37%. This affects short-term capital gains, which are taxed at the ordinary income tax rate.

7. Check your Filing Status Married filing jointly or married filing single? It isn’t always obvious which filing strategy works best. Usually a joint filing offers more benefits, but filing separately could reduce your adjusted gross-income (AGI) enough to stay below phase-out limits on deductions.

8. Use Health Savings Accounts (HSAs) If your health insurance plan is a high-deductible HSA-qualified plan, you may be able to create and use an HSA that allows you to make tax-deductible contributions. When used for qualified medical expenses, withdrawals from an HSA are tax-free. Just like IRA contributions, HSA contributions can be made to the limits up to April 17th, 2018, and applied to your 2017 taxes. The contribution limits for tax year 2017 are $3,400 for a self-only coverage plan and $6,750 for a plan offering family coverage, with additional catch-up contributions of $1,000 allowed for filers age 55 or older. In 2018, the limits for self-only accounts and family coverage accounts increase to $3,450 and $6,900, respectively. Prepare Form 8889 to report your HSA contributions and withdrawals. Form 1099-SA, which you'll receive from your HSA administrator, will list your withdrawals to confirm which payments went to qualified medical expenses.

The HSA deduction and the traditional IRA deductions are both above-the-line deductions, which Bronnenkant explains are better than below-the-line deductions, because they reduce your taxable income whether or not you itemize on your tax return.

9. Time Events By moving end-of-year expenses such as mortgage payments and self-employment taxes forward into December, you can apply the deductions to this year. The TCJA has kept the tax cuts for home owners in place, with a few changes. Other possibilities include moving medical expenses forward to consume any remaining funds in a Flexible Savings Account (FSA) and asking for bonuses and payments to be deferred into January if the income will push you over a phase-out threshold.

10. Watch Mutual Fund Distributions When buying mutual funds, take care to check the distribution date of dividends. If you buy right before dividends are distributed, the shares will fall in value by the distribution amount, but you will be hit with the full tax bill. Buy after the distribution to avoid excess taxes and get a better share price as an extra bonus.

11. Modify your W-4 If you were slammed with a huge tax bill last year, you are not withholding enough of your income throughout the year. Adjust your withholding rate on the W-4 form you give to your employer, which instructs your employer on how much tax to withhold from your paychecks. Alternatively, if you got a big refund last year, it may be necessary to lower the withholding rate on your W-4. Otherwise, you're essentially giving the government a free loan and letting it collect interest on your money before paying it back to you. You may make changes to your W-4 at any time during the year.

President Trump tried to cut your tax bill. Why not help yourself, too? With a little effort you can hold on to more of your money at tax time.

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