Is Your Tax Bill Too High? 22 Ways to Save
Certain things in life are unavoidable, and taxes are one of them. While there have been many changes lately, the good news is that there are still numerous ways to reduce the amount of money you're paying the government each April. Cheapism asked experts across the country to share their top tips for saving money on income taxes. Here's what they had to say.
By and large people, underreport their charitable contributions, says tax expert Melinda Kibler of Palisades Hudson Financial Group. "Many people don't keep records throughout the year. Missing many small donations can be costly," she explained. "If you dropped off a bag of clothing at a local charity or gave them $5 at the cash register of your grocery store, make sure to track these contributions so you get the highest tax benefit possible."
A move to a new state may decrease your annual tax burden, says Tommy Sullivan of Retirement Living. "For the most part, taxes are the same in all 50 states," Sullivan said. "If someone is wanting to save money on the taxation of their income, they should explore moving to a state that does not tax individual income." Currently, seven states do not tax individual income, retirement or otherwise: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
One of the simplest and most effective ways for most people to save on taxes is to take full advantage of their 401(k) and IRA accounts, advises Seat Potter of MyMoneyWizard.com. "If your retirement accounts are traditional, these contributions directly reduce your taxable income today, which can have you saving thousands on your tax bill," Potter said.
Those who run a business from home or work from home may qualify for a home office deduction. "According to the IRS, this means a space designated as your home office that is used regularly and extensively for conducting business," explains Deborah Sweeney, CEO of MyCorporation.com. Those who do qualify under the IRS guidelines for home offices are eligible to write off such things as rent, utilities, real estate taxes, and more.
If you're self-employed and use your vehicle for work purposes, keep a meticulous record of your mileage, says Julie Ramhold, consumer analyst with DealNews. "You can deduct (the mileage) any time you use your car for work-related trips, including errands, or driving to the office or attending a meeting," Ramhold said.
Don't forget about that interest paid on student loans, it, too, continues to be deductible, advises Nate Matherson, co-founder and CEO of LendEDU.com. "You can deduct up to $2,500 in interest paid on student loan debt," Matherson said. "Your student loan servicer will provide you with a 1098-E statement of interest paid at the beginning of each year. If you have multiple servicers, don't forget to collect your 1098-E from each of your servicers."
Even with changes to the tax laws under the Tax Cuts and Jobs Act, experts agree that buying a house is still often a good way to reduce your taxes. Owning a home allows you to deduct interest payments, depreciation and more, says Jeff Miller, cofounder of AE Home Group. But be careful, the new tax law limits the combined state income tax and property tax deduction to $10,000. "Buying a house is a great idea," Miller said. "But it's important to research your state's income and property tax liability."
If you own appreciated securities in a taxable account, consider contributing some of them to charity, suggests Kibler of Palisades Hudson Financial Group. "If you contribute a stock, bond, or fund with an unrealized long-term capital gain, you can take a tax deduction for the value of the security as of the date of the contribution, while avoiding paying capital-gains tax," Kibler explained. It's best to contribute the security directly to the charity, transferring it electronically through your brokerage company.
Contributions to health savings accounts are deductible on individual tax returns whether or not you itemize deductions. "The funds in an HSA grow tax deferred like an IRA or 401(k)," said Michael Dinich, tax and retirement adviser at YourMoneyMatters. "Prior to age 65, the funds can be used to pay for qualifying medical expenses income-tax-free. After age 65, the funds can be used income-tax-free to pay for qualifying medical expenses, long-term-care insurance or health insurance." And if you don't end up using the money for health-care expenses, you can save it for retirement. After age 65, funds in an HSA can be used just like an IRA or 401(k).
Now is the time to go solar. Installing solar panels or solar hot water systems in your home qualifies you for a tax credit worth 30 percent of the expenditures made. This may very well be the last year that opting for a more sustainable and environmentally friendly source of energy earns such a significant tax break, says Dinich of Your Money Matters. "Unless the rules get changed … starting in 2019 the credit will be reduced a few percent each year," explained Dinich.
Claiming your children as dependents can pay off in multiple ways. For instance, parents can claim one exemption of about $4,000 for each child. In addition, there's the Child Tax Credit, which can reduce your federal income tax by as much as $1,000 per qualifying child depending on your income, according to the IRS. A variety of criteria must be met in order to receive this credit, such as the child's age, relationship, support, citizenship, and residence.
In the same way that you can claim children as dependents, you can also claim elderly parents, says Dane Dickler, partner at the accounting firm EisnerAmper. "When it comes to claiming dependents most people only think of kids, but it can also be a parent," said Dickler. "A lot of elderly parents move back in with kids and have little or no income. If this is the case, they should be claimed as a dependent." You must have provided more than half of your parent's support during the tax year in order to claim them as a dependent.
The purchase of a plug-in or hybrid car can potentially qualify you for a tax credit, says Dinich of Your Money Matters. The credit ranges from $2,500 to $7,500 per new vehicle purchased for use in the United States. The exact credit amount depends on factors such as the size of the vehicle and its battery capacity. To determine the specific credit for individual vehicles, visit FuelEconomy.gov's page on tax credits for electric and hybrid vehicles.
Few people realize that job search expenses can be deducted, said Matherson, co-founder and CEO of LendEDU.com. "If you lose your job, and you're planning to stay in the same field, you can deduct some of your job search expenses on your tax return," he explained. "To qualify, your job search expenses will need to exceed 2 percent of your adjusted gross income. You can deduct your job search expenses over the 2 percent threshold." Depending on your length of unemployment, it might be easier than you think to meet the qualifications for this deduction. The job search process is tough, so why not get yourself a deduction for all the hard work?
While on the topic of moving, did you move for work in 2017? If you relocated to start a new job you might be able to deduct expenses incurred, such as the cost of a U-Haul rental or fees for a storage unit, says Josh Zimmelman, president of Westwood Tax & Consulting. In order to qualify for this deduction, the move must meet various IRS requirements, such as a distance test. In other words, the distance from your new home to your new job can't be more than the distance from your former home to the new job.
Money spent on higher education and on post-secondary school such as undergraduate, graduate, and professional degree courses (including courses to acquire or improve job skills) may be eligible for a Lifetime Learning Credit worth up to $2,000 a year. The credit may be claimed for yourself, a spouse, or a dependent.
With standard deductions now doubled, one must make a sizeable donation to a charity in order to earn any tax benefit. But if you're considering making significant contributions to charity at some point down the road (an amount greater than your annual standard deduction of $12,000 for individuals and $24,000 for joint filers), it may be more beneficial to open a donor-advised fund now to reduce your taxes, says Dickler of EisnerAmper. These funds are treated as public charities, and money contributed to them is tax deductible. "If you're giving $5,000 a year, every year now to a charity, there may be no tax benefit," said Dickler. "But you can take several years of donations and preload a donor-advised fund and get a current deduction."
Do you pay for childcare while you work? Qualifying parents of children under 13 can claim dependent care credit of up to 35 percent of the childcare expenses, explains Zimmelman of Westwood Tax & Consulting. Even if your child turned 13 during the year, you can still claim a portion of this credit for the time that they were under 13. You can also receive the credit for children or other dependents over age 13 if they are unable to care for themselves.
Independent workers, gig workers, or those who work for third parties may want to incorporate their business. Not only does it protect assets, you may also now receive significant tax benefits, says Sweeney of MyCorporation.com. "With the new tax laws, these businesses could stand to save 20 percent. Business income that passes through to an individual from a pass-through entity will be taxed at individual tax rates less a deduction of up to 20 percent to bring the rate lower," Sweeney explained.
Alimony payments for 2017 are tax deductible and the spouse receiving the money must report the money as taxable income, says Zimmelman. "It's important that both figures match or you could both be flagged for an audit," said Zimmelman. Under the new tax plan however, things will reverse: alimony payments will no longer be deductible and received alimony will no longer be taxable.
Children can receive up to $2,100 in unearned income tax-free, notes Scott Johnson, owner of WholeVsTermLifeInsurance.com. (Unearned income is income derived from investments rather than work.) You can make the most of this by putting a limited amount of savings that's earning income in your children's names, Johnson said. "Consider index bond funds or high quality dividend paying stock funds that have good history of earning yearly income," he said.
One last way to reduce annual expenses associated with taxes – file your taxes for free, suggests Kat Tretina, personal finance expert for Student Loan Hero. "You can skip paying hundreds for tax preparation," explained Tretina. If you're making $54,000 or less, you can have an IRS-trained volunteer help prepare and submit your tax return through the Volunteer Income Tax Assistance program. The program also provides assistance to those with disabilities or who have limited English skills.
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