Here are 12 easy moves to cut your tax bill
An unexpected tax bill can ruin anybody鈥檚 day. To help avoid that unpleasant surprise, here are 12聽easy moves many people聽can make to cut their聽tax bills. In many cases, you聽must聽itemize rather than take the standard deduction in order to use聽these strategies, but the extra effort may be worth it.
1. Tweak your W-4
The聽W-4 is a form you give to your employer, instructing it on how much tax to withhold from each聽paycheck. If you got a huge tax bill this year and don鈥檛 want another surprise next year, raise your withholding so you owe less next April. (And if you got a huge refund, do the opposite and reduce your withholding 鈥� otherwise, you鈥檙e just giving the government a free loan.)聽You can change your W-4 any time.
2. Stash money in your 401(k)
Less taxable income means less tax, and聽401(k)s are a popular way to reduce tax bills. The IRS doesn鈥檛 tax what you divert directly from your paycheck into a 401(k). For 2017, you can聽funnel up to $18,000 per year into an account, the same amount as for 2016. 聽If you鈥檙e 50 or older, you can contribute up to $24,000. These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. And if your employer matches some or all of your contribution, you鈥檒l get free money to boot.
3. Contribute to an IRA
There are two major types of individual retirement accounts:聽听补苍诲听. You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is聽covered by a retirement plan at work and how much you make. For the 2016 tax year, for example, you may not be able to deduct your contributions if you鈥檙e covered by a retirement plan at work, you鈥檙e married and filing jointly, and your modified adjusted gross income was $118,000 or more. There are limits to how much you can put in an IRA, too. For 2017, the limits are the same as they were in聽2016: $5,500 per year, or $6,500 for people 50 or older. You have until the April tax deadline to聽, which gives you extra time to take advantage of this strategy.
4. Save for college
Setting aside money for Junior鈥檚 tuition can save you a few bucks on your tax bill, too. A popular option is to make contributions to a 529 plan, a savings account operated by a state or educational institution. You can鈥檛 deduct your contributions on your federal income taxes, but you might be able to on your state return if you鈥檙e putting money in your state鈥檚 529 plan. Be aware, too, that there may be gift-tax consequences if your contributions plus any other gifts to a particular beneficiary exceed $14,000 during the year.
5. Fund your聽FSA
If your employer offers a flexible spending account, take advantage of it to lower your tax bill. The IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year; the limit was $2,550 for 2016聽and is $2,600 for 2017. Sure, you鈥檒l have to use the money during the calendar year for medical and dental expenses, but you can also use it for related everyday items such as Band-Aids, pregnancy test kits, breast pumps and acupuncture for yourself and your qualified dependents. Some employers might let you carry up to $500 over to the next year.
6. Subsidize your Dependent Care FSA
This FSA with a twist is another handy way to reduce your tax bill 鈥� if your employer offers it. The IRS will exclude up to $5,000 of your pay that you have your employer divert to a Dependent Care FSA account, which means you鈥檒l avoid paying taxes on that money. That can be a huge win for parents of kids under 13, because before- and after-school care, day care, preschool and day camps usually are allowed uses. Elder care may be聽included, too. What鈥檚 covered can vary among聽employers, so check out your plan鈥檚 documents.
7. Rock your HSA
Health savings accounts are tax-exempt accounts you can use to pay medical expenses. If you have a high-deductible health聽care plan, you may be able to lighten your tax load by contributing to an HSA. Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, so聽long as you use them for qualified medical expenses. For 2017,聽if you have self-only high-deductible health聽coverage, you can contribute up to $3,400; the limit for 2016 was $3,350.聽If you have family high-deductible聽coverage, you can contribute up to $6,750 in 2017, the same as in 2016.聽Your employer may offer an HSA, but you can also聽start your own account at a bank or other financial institution.
8. See if you鈥檙e eligible for the Earned Income Credit
The rules can get complex, but if you earned less than $54,000, it might be worth looking into. Depending on your income, marital status and聽how many children聽you have, you might qualify for a tax credit of up to $6,269 for 2016 and $6,318 in 2017. A聽tax credit is a dollar-for-dollar reduction in your actual tax bill聽鈥斅燼s opposed to聽a tax deduction, which simply reduces how much of your聽income gets taxed. It鈥檚 truly found money, because if a credit reduces your tax bill below zero, the money may be聽refunded to you.
9. Give it away
Charitable contributions are deductible, and they don鈥檛 even have to be in cash. If you鈥檝e donated clothes, food, old sporting gear or household items, for example, those things can lower your tax bill if they went to a bona fide charity and you got a receipt. Many聽聽include modules that estimate the value of each item you donate, so make a list before you drop off that big bag of stuff at Goodwill 鈥� it can add up to big deductions. For example, a frying pan can get you a $10 deduction and a pair of women鈥檚 jeans $18, according to the TurboTax ItsDeductible program. An old portable basketball hoop could net almost $100. If you volunteer, there are a few options, too: You can deduct your out-of-pocket expenses for serving a聽qualified organization, as well as mileage or gas used going to and from the location.
10. Keep a file of聽your medical expenses
If you鈥檝e been in the hospital or had other costly medical or dental care, keep those receipts. In general, you can deduct qualified medical expenses that are more than 10% of your adjusted gross income聽for that tax year. So, for example, if your adjusted gross income聽is $40,000, anything beyond the first $4,000 of your medical bills 鈥� 10% of your AGI 鈥� could be deductible. If you rang up $10,000 in medical bills, $6,000 of it could be deductible in this example. If you or your spouse is聽65 or older, the 10% threshold dips to聽7.5% for the 2016 tax year, giving you an even bigger deduction. (Note that this dip expired at the end of 2016. In the 2017 tax year it鈥檚 10% for everyone.)
11. Sell those dogs weighing down your portfolio
Knowing you鈥檙e getting a tax deduction might make it a little easier to unload some of those bad stock picks that have been weighing down your portfolio. You can deduct losses on stock sales, which can offset any taxable capital gains you might have. The limit on that offset is $3,000, or $1,500 for married couples filing separately. One other note: Never let tax avoidance become a substitute for wise investing. Sell a stock only if it truly doesn鈥檛 work for your portfolio anymore. Don鈥檛 do it just to get a tax break, because if you decide to buy back your stock within 30 days, the IRS can take back your deduction.
12.聽Get the timing right
From a tax perspective, there鈥檚 a huge difference between doing something on Dec. 31 and doing it a聽day聽later. If you know an upcoming expense is going to be tax-deductible, think about whether you can pay for it聽this year rather than next year. Making January鈥檚 mortgage payment in December, for example, could聽give you an extra month鈥檚 worth of mortgage interest to deduct this year. Similarly, if you know you鈥檙e near the聽threshold for the medical-expenses deduction, moving that root canal up might make the pain more bearable if the cost suddenly becomes deductible, too.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email:torem@nerdwallet.com.
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