We would like to share some strategies that can help you lower your taxes, sometimes by thousands of dollars. Some help you save time and money when preparing your tax return. Other strategies help you avoid costly penalties and interest on both federal and state taxes. All in all, these 9 steps will lower your blood pressure while keeping more money in your pocket:
1. Contribute to retirement accounts
If you haven’t already funded your retirement account for 2017, do so by April 17, 2018. That’s the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA.
- However, if you have a Keogh or SEP and you get a filing extension to October 15, 2018, you can wait until then to put 2017 contributions into those accounts. To start tax-free compounding as quickly as possible, however, don’t dawdle in making contributions.
Making a deductible contribution will help you lower your tax bill this year. Plus, your contributions will compound tax-deferred. It’s hard to find a better deal.
- If you put away $5,000 a year for 20 years in an investment with an average annual 8 percent return, your $100,000 in contributions will grow to $247,000.
- The same investment in a taxable account would grow to only about $194,000 if you’re in the 25 percent federal tax bracket (and even less if you live in a state with a state income tax to bite into your return).
To qualify for the full annual IRA deduction in 2017, you must either:
- not be eligible to participate in a company retirement plan, or
- if you are eligible, you must have adjusted gross income of $62,000 or less for singles, or $99,000 or less for married couples filing jointly.
- If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $186,000.
For 2017, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2017 is $54,000.
Although choosing to contribute to a Roth IRA instead of a traditional IRA will not cut your 2017 tax bill—Roth contributions are not deductible—it could be the better choice because all withdrawals from a Roth can be tax-free in retirement.
- Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $5,500 ($6,500 if you are age 50 or older by the end of 2017) to a Roth IRA, you must earn $118,000 or less a year if you are single or $186,000 if you’re married and file a joint return.
The amount you save for making a contribution will vary. If you are in the 25 percent tax bracket and make a deductible IRA contribution of $5,500, you will save $1,375 in taxes the first year. Over time, future contributions will save you thousands, depending on your contribution, income tax bracket, and the number of years you keep the money invested.
2. Make a last-minute estimated tax payment
If you didn’t pay enough to the IRS during the year, you may have a big tax bill staring you in the face. Plus, you might owe significant interest and penalties, too.
How could that happen? Withholding on your paycheck may be out of whack, or you may have received a big gain from selling stock. According to IRS rules, you must pay 100% of last year’s tax liability or 90% of this year’s tax or you will owe an underpayment penalty.
- If your adjusted gross income for 2016 was more than $150,000, you have to pay more than 110 percent of your 2016 tax liability to be protected from a 2017 underpayment penalty. If your tax payments were a bit light, you may be stuck.
If you make an estimated payment by January 15, though, you can erase any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then.
A note of caution: Try not to pay too much. It’s better to owe the government a little rather than to expect a refund. Remember, the IRS doesn’t give you a dime of interest when it borrows your money.
3. Organize your records for tax time
Good organization may not cut your taxes. But there are other rewards, and some of them are financial. For many, the biggest hassle at tax time is getting all of the documentation together. This includes last year’s tax return, this year’s W-2s and 1099s, receipts and so on.
How do you get started?
- Print out a tax checklist to help you gather all the tax documents you’ll need to complete your tax return.
- Keep all the information that comes in the mail in January, such as W-2s, 1099s and mortgage interest statements. Be careful not to throw out any tax-related documents, even if they don’t look very important.
- Collect receipts and information that you have piled up during the year.
- Group similar documents together, putting them in different file folders if there are enough papers.
- Make sure you know the price you paid for any stocks or funds you have sold. If you don’t, call your broker before you start to prepare your tax return. Know the details on income from rental properties. Don’t assume that your tax-free municipal bonds are completely free of taxes. Having this type of information at your fingertips will save you another trip through your files.
4. Itemize your tax deductions
It’s easier to take the standard deduction, but you may save a bundle if you itemize, especially if you are self-employed, own a home or live in a high-tax area.
- It’s worth the bother when your qualified expenses add up to more than the 2017 standard deduction of $6,350 for singles and $12,700 for married couples filing jointly.
- Many deductions are well known, such as those for mortgage interest and charitable donations.
However, taxpayers sometimes overlook miscellaneous expenses, which are deductible if the combined amount adds up to more than 2% of your adjusted gross income. These deductions include tax-preparation fees, job-hunting expenses, business car expenses and professional dues.
You can also deduct the portion of medical expenses that exceed 7.5% percent of your adjusted gross income for 2017 and 2018. Beginning Jan. 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of your adjusted gross income.
5. Don't shy away from a home office tax deduction
The eligibility rules for claiming a home office deduction have been loosened to allow more filers to claim this break. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there. Doctors, for example, who consult at various hospitals, or plumbers who make house calls, can now qualify. As always, you must use the space exclusively for business.
Many taxpayers have avoided the home office tax deduction because it has been regarded as a red flag for an audit. If you legitimately qualify for the deduction, however, there should be no problem.
You are entitled to write off expenses that are associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and housekeeping). The percentage of these costs that is deductible is based on the square footage of the office to the total area of the house.
- A middle-class taxpayer who uses a home office and pays $1,000 a month for a two-bedroom apartment and uses one bedroom exclusively as a home office can easily save $1,000 in taxes a year. People in higher tax brackets with greater expenses can save even more.
One home office trap that used to scare away some taxpayers has been eliminated. In the past, if you used 10% of your home for a home office, for example, 10% of the profit when you sold did not qualify as tax-free under the rules that let homeowners treat up to $250,000 of profit as tax-free income ($500,000 for married couples filing joint returns).
Since 10% of the house was an office instead of a home, the IRS said, 10% of the profit wasn’t tax-free. But the government has had a change of heart. No longer does a home office put the kibosh on tax-free profit. You do, however, have to pay tax on any profit that results from depreciation claimed for the office after May 6, 1997. It’s taxed at a maximum rate of 25%. (Depreciation produces taxable profit because it reduces your tax basis in the home; the lower your basis, the higher your profit.)
6. Provide dependent taxpayer IDs on your tax return
Be sure to plug in Taxpayer Identification Numbers (usually Social Security Numbers) for your children and other dependents on your return. Otherwise, the IRS will deny the personal exemption of $4,050 in 2017 for each dependent and the $1,000 child tax credit for each child under age 17.
Be especially careful if you are divorced. Only one of you can claim your children as dependents, and the IRS has been checking closely lately to make sure spouses aren’t both using their children as a deduction. If you forget to include a Social Security number for a child, or if you and your ex-spouse both claim the same child, it’s highly likely that the processing of your return (and any refund you’re expecting) will come to a screeching halt while the IRS contacts you to straighten things out.
The $1,000 child tax credit begins to phase out at $110,000 for married couples filing jointly and at $75,000 for heads of households.
After you have a baby, be sure to file for your child's Social Security card right away so you have the number ready at tax time. Many hospitals will do this automatically for you. If you don’t have the number you need by the tax filing deadline, the IRS says you should file for an extension rather than sending in a return without a required Social Security number.
7. File and pay on time
If you can’t finish your return on time, make sure you file Form 4868 by April 17, 2018. Form 4868 gives you a six-month extension of the filing deadline until October 15, 2018. On the form, you need to make a reasonable estimate of your tax liability for 2017 and pay any balance due with your request.
Requesting an extension in a timely manner is especially important if you end up owing tax to the IRS. If you file and pay late, the IRS can slap you with a late-filing penalty of 4.5 percent per month of the tax owed and a late-payment penalty of 0.5 percent a month of the tax due. The maximum late filing penalty is 22.5 percent and the late-payment penalty tops out at 25 percent. By filing Form 4868, you stop the clock running on the costly late-filing penalty.
8. File electronically
Electronic filing works best if you expect a tax refund. Because the IRS processes electronic returns faster than paper ones, you can expect to get your refund three to six weeks earlier.
9. Decide if you need help
We can handle the most complex returns with ease (and allow you to file your taxes electronically for a faster refund). You just need to answer simple questions, such as whether you've had a baby, bought a home or had some other life-changing event in the past year. We will then fill out all the right forms for you.