25 Tax Credits and Deductions That Could Save You Thousands
The 2017 tax deadline is approaching, but there are still deductions and credits out there for procrastinators. While some of the best required taxpayers to take action before Dec. 31, there are others that can be used right up to the filing deadline. When possible, seek out credits rather than deductions: Each dollar in tax credits is one less dollar in taxes paid, while deductions that reduce taxable income offsets taxes by only 10 to 39.6 cents for every dollar deducted, depending on the tax bracket. With help from Melinda Kibler, a certified financial planner and enrolled agent with Palisades Hudson Financial Group in Fort Lauderdale, Florida, we found a host of last-minute deductions and credits to choose from.
While it's too late to make charitable donations for 2017, Kibler suggests tracking down receipts for every small donation made throughout the year. Giving to eligible nonprofits, religious organizations, and government organizations (such as a school or public library) are deductible. Especially if you gave cash or goods, find receipts and add them to the tally. Remember, contributions to charitable organizations can be deducted for up to 50 percent of adjusted gross income, though lower thresholds apply for certain charities. "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," Kibler says.
There are a lot of investment expenses eligible for deduction. Fees add up quickly and are deductible when they exceed 2 percent of adjusted gross income, though they can't be related to a tax-exempt account such as a Roth IRA and must be paid with non-retirement assets. Basically, if fees come out of an IRA automatically, they aren't deductible; if an adviser sends a bill, though, feel free to check in with them to see how often you were billed in 2017. "I usually recommend paying investment management fees for retirement assets separately. You get a double benefit -- your plan grows faster, and you get a deduction," Kibler says.
While tuition and fees deductions have dried up in recent years, the American Opportunity Tax Credit remains an option for eligible students -- not grad students or long-term undergrads; it's available only during the first four years college -- with at least half-time status at an accredited school. It covers all of the first $2,000 in expenses and 25 percent of the next $2,000 (or $2,500 total). Schools will send students a 1098-T showing the amount paid last year in tuition and fees, but even expenses including books, supplies, and equipment such as computers can be offset. If the 1098-T does not max out the allowed credit, hold onto those receipts for supplies.
Welcome to the tax credit for the older student. Anyone taking classes at an eligible educational institution to acquire or improve job skills is eligible for it, even students taking just one class well after their four years of undergraduate education. There are limits, though. Students are credited for only 20 percent of $10,000 in expenses ($2,000 is the maximum), though it can be applied to tuition, fees, books, supplies, and equipment. Individuals with an adjustable gross income between $55,000 and $65,000 (or between $111,000 but less than $131,000 for married filing jointly), will get a reduced amount. If it's over those thresholds, you can't claim the credit at all.
Yes, you get benefits for claiming a child as a dependent, but working parents can also claim a credit for paid care even if it came while they were looking for work. The cost of an adult caregiver also falls under this credit if they're taking care of a disabled spouse or dependent. It offsets 20 percent to 35 percent of allowable expenses based on adjustable gross income. The maximum credit is $3,000 for one dependent or $6,000 for two or more.
The Earned Income Tax Credit is for low- and moderate-income taxpayers with "earned income" such as wages, salaries, or self-employment income (but not Social Security, unemployment, or investment income). The income limits are strict, ranging from $15,010 for a single person with no children to $53,930 for a married couple with three children or more. The credit's value is worth $510 to $6,318 depending on filing status and number of dependents, but requires recipients to have less than $3,450 in investment income for the year.
If you or your family have health insurance from a government-run marketplace built through the Affordable Care Act, you may be eligible for this credit. Income is limited to $11,770 to $47,080 for individuals and $24,250 to $97,000 for a family of four, but the credit is usually equal to the cost of the second-lowest silver plan. Taxpayers can get this credit in advance to offset monthly premium bills, but claim too much and it must be paid back when filing. Those who get too little can claim the remainder when submitting returns.
It isn't much, but the Savers Credit gives back to people with low- and moderate-income who contribute to a qualified retirement account. Taxpayers can get a credit for 10 percent, 20 percent or 50 percent of the first $2,000 contributed, depending on income and family size. To get the minimum 10 percent, the maximum allowed income is $31,500 for single filers, $47,250 for the head of a household, and $63,000 for joint filers.
This one gets dicey in 2017. If you bought your home and had a mortgage in place before Dec. 15, you can still deduct $1 million on mortgage interest and interest on home equity loans. Qualified mortgage insurance premiums could be deductible as well. But if you signed after that date, the deduction is capped at $750,000 and home-equity deductions are limited to loans that improved the home itself.
Taxpayers who get a Qualified Mortgage Credit Certificate from a local or state government may be able to claim the Mortgage Interest Credit. The home must be the taxpayer's primary residence, and interest payments can't go to a taxpayer's relative. The credit is worth up to $2,000, and unused portions may be carried forward to the following year.
Taxpayers 65 or older -- or younger but retired or on permanent and total disability -- may be eligible for a credit worth up to $7,500. Taxable income must be below $17,500 (or $20,000 if married and filing jointly) and nontaxable Social Security, pension, or disability benefits must be below $5,000. If both partners qualify and file jointly, the income limits are $25,000 for taxable income and $7,500 for nontaxable benefits.
Whether it's through an employer or private plan, a traditional Individual Retirement Arrangement funded with pretax money -- unlike a post-tax Roth IRA -- is deductible up to a certain limit. Even if an account is opened and funded in 2018, any contributions made before April 18 (the tax-filing deadline this year) can be credited to the previous year. For 2017, the maximum contribution is $5,500 (or $6,500 for those 50 or older). There are also deduction limitations depending on the taxpayer's income and access to an employer-sponsored retirement account.
You can get a larger deduction for medical expenses in 2017 by doing absolutely nothing. Back in tax year 2016, taxpayers 65 years or older could deduct total medical expenses that exceeded 7.5 percent of their adjusted gross income. Even married couples that included only one person age 65 or older were eligible for that threshold. Taxpayers younger than 65 percent could deduct only medical expenses that exceeded 10 percent of AGI. That threshold was expected to jump to 10 percent of AGI for everyone, including those over 65, for 2017. The recent tax reform, however, set the threshold for everyone at 7.5 percent of gross income and made it retroactive to 2017.
A longtime friend to small-business owners and freelancers, the Simplified Employee Pension IRA offers higher contribution limits than a traditional IRA. As their own employer, business owners and freelancers can contribute up to 25 percent of their annual income or $54,000, whichever is lower. As with a traditional IRA, contributions made before the tax-filing deadline (without an extension) can be applied to the previous year.
Unfortunately, taxpayers can't just set one of these up before the tax deadline and save some cash. The one-participant 401(k), or solo or self-employed 401(k), requires you to file for a federal Employer Identification Number and set up the account by Dec. 31. But once a solo 401(k) is established, taxpayers can make contributions right up to the tax-filing date (April 18, or Oct. 18 with an extension). Total contributions can't exceed $54,000, but that's still nearly four times the maximum employee contribution to a standard 401(k) of $18,500.
If you bought new office furniture, computer servers, cranes, end loaders, cattle, trucks, or taxis for a business last year, you may be able to write off more from them than you thought. Even if you built oil derricks, warehouses, office space, or utility plants after Sept. 26, 2017, the bonus depreciation you could claim on the first year of owning those assets increased from 50 percent just a day before to 100 percent "expensing" from Sept. 27 onward. Recent tax reform also extended bonus depreciation from items bought or built new to both new and used assets. That "expensing" also applies to productions (qualified film, television, and/or staged performances) and even certain fruit or nuts planted or grafted after Sept. 27.
The self-employed, including those with freelance income, can write off educational expenses for workshops, webinars, books, or other material that maintain or improve skills. While educational expenses to meet the minimum requirements of a trade or business -- or related to getting into a new line of work -- don't qualify, refresher courses, courses on current developments, and academic or vocational courses would. The deduction is the amount by which qualifying work-related expenses is greater than 2 percent of adjusted gross income.
Self-employed people can deduct 53.5 cents a mile driven for business purposes during the previous year; the rate goes up to 54.5 cents in 2018. That said, detailed mileage logs are required. Writing down the miles driven (odometer readings at the beginning and end of the trip help), the date, the business purpose of the trip, and the destination should be adequate. Parking fees and tolls during business travel are also deductible; fees and expenses related to commuting aren't.
A 53.5 cents-a-mile deduction applies to job-seekers too, along with expenses such as meals and lodging if incurred while traveling to look for new work. Job-seekers can also deduct costs associated with preparing and mailing a résumé and hiring a placement agency. Taxpayers can claim expenses that are more than 2 percent of their adjusted gross income -- but can't deduct those expenses for new occupations or first-time job hunts.
This one is tricky, as simply working on the couch or at a kitchen table doesn't cut it. A home office has to be a dedicated space for working and meeting clients and customers. Furthermore, office-related utilities including telephone, internet, and even heat and electricity have to be parsed out separately. You can try to determine which portion of a home's expenses, taxes, insurance, and depreciation is dedicated to a home office; a simplified version multiplies the square feet of the room by $5 (if the total size is 300 square feet or smaller).
Go ahead and take advantage of this one now. Under new tax reforms, deductions for state and local taxes (property tax and sales or income tax) are capped at $10,000 from 2018 through 2025. If your total state and local taxes and property taxes are typically more, however, don't think you can just pay a portion in 2017 and get the full tax deduction on 2017 taxes. The new tax law prohibits prepaying 2018 state and local taxes that were not imposed in 2017.
You may be able to take a tax credit of up to $13,570 for qualified expenses paid to adopt a child in 2017. Those expenses include adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging), and readoption expenses for a foreign child. Those credits apply to adoptions of anyone under 18 years old or physically or mentally incapable of taking care of themselves. If your modified adjusted gross income is more than $203,540, the credit is reduced; those with MAGI of $243,540 or more can't take the credit.
Despite fears it would be eliminated, this credit still offers buyers of electric or plug-in hybrid vehicles up to $7,500 for the purchase. While this credit isn't going to be around forever, it's still a formidable tool for boosting sales of these fuel-efficient vehicles in spite of low gas prices and the market's hunger for less-efficient SUVs.
Most people who sell a home know that, if they've sold at a gain, they may exclude up to $250,000 of it if single or $500,000 if married filing jointly. Granted, you actually had to live in that home for two of the past five years (military, foreign service, and intelligence personnel are exempt). What most homeowner don't realize is that the gain isn't only on the sale price of the home, but on improvements made, real estate agent sales commissions, closing costs, recording fees, and survey fees. Kibler suggests keeping clear records of all of it in case of an audit and to keep a big chunk of the gain tax-free.
If you paid or accrued income tax in a foreign country or U.S. possession in 2017, you can use it as a credit against your U.S. income tax. If you already exclude foreign earned income, foreign housing costs, foreign possessions, or income from Puerto Rico exempt from U.S. tax, you aren't eligible. Also, your foreign tax credit can't be more than your U.S. tax liability multiplied against a fraction made up of your taxable income from outside of the United States and your total taxable sources.
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