While tax season may not inspire quite the same amount of cheer as the preceding holiday season, saving money (especially money you can reinvest or put toward other financial goals) is something that anyone can appreciate. As you're pulling together various forms and information to prepare your 2017 tax return, here are some ideas to help you trim your tax bill and potentially enhance tax savings in the future.
1. Save on taxes now with tax-deductible retirement accounts
Some contributions made to eligible retirement accounts may be financially advantageous. If you didn't do so in 2017, consider contributing the maximum allowed in 2018 to your employer's workplace savings plan—up to $18,500 and another $6,000 if you're age 50 or older.
If you meet income qualifications, contributions of up to $5,500—plus another $1,000 if you are at least age 50—to a Traditional IRA may be tax deductible in 2017 and 2018.
And remember, you do have extra time (until April 17, 2018) to make an IRA contribution for tax year 2017.
2. Save on taxes later with a Roth IRA
Contributions to traditional IRAs may reduce your current tax bill, but money you put into a Roth IRA is contributed after tax. It's tax-free sailing after that.1 Investment gains and qualified distributions are tax free.
In 2018, maximum allowable contributions remain the same from 2017 for both types of IRAs ($5,500—plus another $1,000 if you are at least age 50). The modified adjusted gross income phase-out range to qualify for a Roth IRA in 2017 was $118,000 to $133,000 for singles and $186,000 to $196,000 for married couples. In 2018, the phase-out range is $120,000 to $135,000 for singles and $189,000 to $199,000 for joint tax filers.
And just like the traditional IRA—you have until April 17, 2018, to contribute to a Roth IRA for the 2017 tax year.
3. Pay it forward
Charitable gifts you make to your alma mater, a favorite charity, or other qualifying institutions can lower your current tax bill (if you itemize) and potential future estate taxes.
Generally, you may deduct up to 50% of your adjusted gross income—though 20% and 30% limitations apply in some cases, according to the IRS. To qualify for the deduction, you must make charitable contributions of money or property to qualified organizations and itemize your deductions.
An easy way to give to multiple organizations is through a qualifying charitable gift fund, also known as a donor-advised fund. Donations are tax deductible, potential earnings are tax free, and you choose your investment preferences and where and when to donate funds.
4. Save on taxes now and later with an HSA
Health Savings Accounts (HSAs) not only offer a great way to save for health care costs today and in the future—they also come with a host of tax advantages. You may have heard about HSAs and you may even have one—but in case you don't, here's what this kind of account involves: HSAs are individual accounts offered by employers, paired with an HSA-eligible health insurance plan to help you pay qualified medical expenses not covered by your health plan. If you put money in an HSA and use that money to pay for a doctor's visit or another qualified medical expense, you never pay federal taxes on the money. And although state taxation may vary, most states follow the federal tax law.
In 2018, you can contribute up to $3,450 annually to an HSA if you have self-only coverage and double that amount—up to $6,850—if you have family coverage. (Employees over age 55 at the end of the tax year can contribute an additional $1,000.)
Contributions are pretax, grow tax-free, and withdrawals that pay qualified health care expenses are tax-free.2 That's 3 tax advantages in one tax-advantaged account. You own the funds in the account and can carry a balance from one year to the next without penalty.
A side benefit: you can use leftover funds for non-health reasons once you're age 65 or older, and you'll only be liable for ordinary income taxes on distributions. (But odds are that you'll have medical expenses in retirement, so leftover funds can be used for those qualified expenses.)
5. Consider these big deductions
When filing your 2017 taxes, keep in mind that joint and single tax filers can generally deduct interest on mortgages up to $1 million for first and second homes (if married filing separately, up to $500,000). For home equity loans and lines of credit up to $100,000, interest is also generally deductible.
Due to the new tax reform changes, starting in 2018, joint and single tax filers can generally deduct interest on mortgages up to $750,000 for first and second homes. This provision would be applicable for taxable years after December 31, 2017 and beginning before January 1, 2026, when the limit would return to $1,000,000. The new tax rules eliminate deductions for interest on home equity loans (unless the loans are used for substantial home improvements and do not exceed the $750,000 total debt limit) until taxable years beginning after December 31, 2025.
For second homes, you don't pay tax on income you earn from using it as a short-term rental, as long as you:
- Rent the property for no more than 14 days during the year AND
- Use the vacation house yourself 14 days or more during the year or at least 10% of the total days you rent it to others
Taxpayers can also take the following standard deduction:
- If you are married and filing jointly, the standard deduction rises to $24,000 for tax year 2018.
- Single taxpayers and married individuals filing separately get a standard deduction of $12,000 in 2018.
6. Help educate a loved one
Putting money into a 529 plan may offer state income tax deductions and help loved ones pay for qualified education expenses tax free. Earnings aren't taxed, and withdrawals that pay for qualified education expenses are typically tax free for recipients. Many states (including Washington, D.C.) let you deduct some or all of your contributions on your state's income tax return.
Though 529s generally have high contribution limits—with many reaching $200,000 and higher per beneficiary—a plan's balance can't exceed total expected qualified education costs. Before the year is out, you might also consider funding a loved one's education directly through a gifting program.
In 2018, you can give up to $15,000 annually to as many people as you want without triggering federal gift taxes. You can make up to 5 years' worth of gift tax exemptions at once—that's $75,000—to fund a 529 plan. If you make the 5-years-at-once contribution, you may not make any other gift-tax-free gifts to the same recipient during the 5-year period.
Take advantage of tax breaks
You can benefit yourself, your loved ones, and your favorite causes while working to help reduce the impact of taxes throughout your lifetime by doing a little research, consulting seasoned experts, and making smart moves at the right time.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917