Now is a good time to review your financial situation and do a rough estimate of your income tax bill for the year. This will give you an incentive to consider these short and long-term strategies to minimize your tax bill. Take these steps before year-end to reduce your taxes on your 2017 tax return.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
1. Contribute to an IRA
Socking money away in an IRA doesn’t just help you at retirement—it can also reduce your tax bill today. The maximum tax-deductible contribution to an Individual Retirement Account (IRA) for 2017 is $5,500, $6,500 if you are age 50 or older. (The maximum contribution to a 401(k) plan in 2017 is $18,000, $24,000 if you are age 50 or over.) These benefits phase out as your income increases.
You can open an IRA account at any time and still deduct contributions made until April 17, 2018 on your 2017 taxes, but making them before year-end starts the clock on tax-deferred growth sooner.
2. Make your house energy-efficient
If you make qualified energy-saving home improvements by the end of 2017, you can claim a tax credit of up to 30% of the costs. The improvements must meet federal energy-efficiency standards in order to qualify for the credit. For more information, go to www.EnergyStar.gov.
3. Review investment gains and losses
Consider selling investment losers to offset any capital gains. When calculating your gains and losses, be sure to include mutual fund distributions; they are taxable gains even when you hold onto the shares. You may want to sell appreciated securities before year-end (or donate them to charity; see #7 below). If you have excess losses, they may be carried forward into future tax years, at a rate of no more than $3,000 each year.
4. Shift income from 2017 to 2018
If you expect to be in a lower tax bracket next year, and have control over the timing of some income, consider deferring taxes by shifting receipt of the income into 2018. Possibilities include year-end bonuses, capital gains and self-employment income. Review your situation carefully because your tax rates could be higher in 2018.
5. Bunch elective medical expenses into one year
Because uninsured medical expenses are deductible on federal tax returns only to the extent that they exceed 7.5% of your adjusted gross income (AGI) in 2017 and 2018, you stand a better chance of having enough to deduct if you group those expenses into a single year. In adding up your expenses, consider elective dental work, eyeglasses and contact lenses, insurance premiums that you personally pay for, health and long-term-care insurance, weight-loss and stop-smoking programs, and over-the-counter medical supplies such as hearing aid batteries.
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 their adjusted gross income.
6. Make charitable contributions
You can make year-end gifts to charity with cash or with appreciated securities. If you donate appreciated securities (like stocks), you can take a deduction for the current fair market value.
If you decide to make gifts in cash, you can simply write a check. Or you can put the amount on a credit card in December, pay the bill when it arrives in 2018 and deduct the donation in 2017. Either way, you must submit a letter of acknowledgment from the charity, showing the date of the gift, the amount, and whether you received any tangible benefit in exchange, such as a thank you gift.
Donations of used cars may be deducted at fair market value only if the charity uses the vehicle in its tax-exempt work. If the charity sells it, your contribution is limited to the actual proceeds of the sale.
7. Fund college expenses for your child or grandchild
Contribute to a 529 college savings plan for your child or grandchild and you may reap some state income tax benefits. You’ll also ensure tax-free withdrawals from the plan to pay for future college costs. In addition, direct payments to an institution for educational or medical purposes are not subject to gift tax limitations.
8. Establish a health savings account
Taxpayers with high-deductible health plans who are not covered by any other health insurance or enrolled in Medicare may deduct contributions to a health savings account (HSA). HSA distributions are not taxable if you use them to pay for qualified medical expenses including deductibles and co-payments, over-the-counter drugs, long-term care insurance, and health insurance premiums or medical expenses during a time of unemployment.
An HSA provides triple tax savings: Contributions are tax-deductible, earnings on the account are tax-free, and withdrawals for qualified medical expenses are also tax-free. The account goes with you if you change jobs or move, and unused money in the account may be used in future years.
Following these suggestions can reduce your tax bill for 2017 and into the future. But keep in mind that if you are subject to the alternative minimum tax (AMT) you may lose most deductions, so you’ll need to follow very different strategies. And don’t forget state income taxes in your planning; the rules there may differ from federal tax rules.
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