In light of Tax Day arriving in a couple days, we thought you might enjoy this article we found with some interesting facts about taxes through the years.
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Acumen Wealth Advisors believes educating our clients is a priority. Our team works together with our clients’ CPAs to implement tax efficiencies and deploy unified financial plans. We recently met with CPAs Kyle Butler and Matt Hisey of Mauldin & Jenkins and a few of our clients to walk through the new changes to the tax code – and we have made this information available to you as well. Some of the many changes affect individual taxes, rates, and the health care mandate; personal deductions, exclusions and credits; estates and gifts and trust rates; and provisions for pass-through entities. To learn more about recent changes to the tax code watch our highlights video HERE and read our highlights brochure HERE.
This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed.
This original post was written by Martha C. White for Time.
Are you taking all the tax breaks you’re entitled to? Experts say you might be able to reduce your tax bill by taking advantage of the many exemptions, deductions, and credits built into the tax code.
Tax exemptions, deductions, and credits are all mechanisms that can reduce how much you ultimately pay in taxes.
This is the last year you can claim many of these breaks. The tax changes passed into law late last year won’t affect your filing this year. So you’ll definitely want to take this one last chance to claim all the tax relief for which you’re eligible.
Tax exemptions
“Exemptions are above-the-line deductions that allow you to reduce your overall income,” said Mark Jaeger, director of tax development at TaxAct. The most common of these, he said, are personal tax exemptions that let you write off a certain amount per eligible person in your household.
Currently, taxpayers are allowed to claim a personal tax exemption of $4,050 apiece for themselves, their spouse (if married filing jointly), and dependent kids. While the standard deduction is being doubled for tax year 2018, personal exemptions are being eliminated.
Tax deductions: Above- vs. below-the-Line
Tax exemptions and deductions both reduce your amount of taxable income, said Gil Charney, director at The Tax Institute at H&R Block. “It’s not a reduction of your tax liability, but it does reduce your taxable income,” he said.
If the amount of your tax deductions is high enough, you could lower your income enough to drop into a lower tax bracket, said Lisa Greene-Lewis, tax expert at TurboTax.
Tax deductions are referred to as either above- or below-the-line. “Above-the-line versus below-the-line refers to deductions claimed before calculation of adjusted gross income and deductions claimed after calculation of adjusted gross income,” Jaeger said. Some examples of above-the-line deductions include IRA contributions and moving expenses.
If you itemize your taxes rather than taking the standard deduction (which about 30% of taxpayers do), you can take additional below-the-line deductions against expenses like your state and local income tax, mortgage interest, and charitable donations. They are all below-the-line deductions, Jaeger said.
Tax credits: Nonrefundable vs. refundable
Unlike exemptions and deductions, tax credits work a little differently. “A credit reduces the taxes you owe, dollar for dollar,” Greene-Lewis said. You can be eligible for credits even if you don’t itemize and just take the standard deduction.
Tax pros say people miss deductions and credits often because they don’t realize all of the tax breaks available to them. Greene-Lewis said that the Earned Income Tax Credit, for instance, often goes unclaimed. “There are people that don’t file taxes that are definitely eligible for the EITC because it’s for lower to middle income, a lot of people may think they’re under the income filing threshold, but they could be be eligible for that credit and eligible for a refund for federal taxes taken out of their paycheck.”
That’s because the EITC is what’s known as a refundable credit. Nonrefundable credits can knock your tax bill all the way down to zero, but refundable credits, as the name implies, can essentially have the government paying you.
The deadline when taxes are due in 2018 is Tuesday, April 17.
House and Senate Republicans have released a final plan to resolve the differences between their tax overhaul bills. The legislation would cut taxes for corporations. American taxpayers, in large part, would also get cuts, though most of the changes affecting taxpayers would expire after 2025.
Income taxes | Current Law | G.O.P. Bill |
The bill would lower individual tax rates overall. But to comply with Senate budget rules, the individual tax cuts would expire after 2025. | ||
Tax brackets | Seven | Seven, lower overall |
Top rate | 39.6% | 37% |
starts at: | $426,700 / $480,050 (singles/couples) |
$500,000 / $600,000 (singles/couples) |
Alternative Minimum Tax | Alternative income tax calculation for high-income taxpayers | Keeps, but increases exemption so fewer will pay it |
Standard deduction and exemptions | ||
The standard deduction would nearly double, so many more people would end up taking it. | ||
Standard deduction | $6,500 / $13,000 (singles/couples) |
$12,000 / $24,000 (singles/couples) |
Personal exemptions | $4,150 per taxpayer and dependent | Eliminates |
Family tax credits | ||
The child tax credit would double, and it has a larger refundable portion that would allow more lower-income families to benefit. | ||
Child tax credit | $1,000 | $2,000 |
Refundable portion: | 15% of earnings over $3,000 | Up to $1,400 |
Credit for other dependents | None | $500 |
Family tax credits phase out starting at: | $75,000 / $110,000 (singles/couples) |
$200,000 / $400,000 (singles/couples) |
Inflation | ||
The biggest long-term change for taxpayers in the bill, it would result in a tax increase over the long run, long after the tax cuts expire. | ||
Inflation measure used for certain income thresholds | Consumer Price Index (CPI) | Chained CPI (C-CPI), a less generous measure |
Education |
Current Law |
G.O.P. Bill |
Education credits | American Opportunity Tax Credit, Lifetime Learning Credit and Hope Scholarship Credit | No change |
Student loan interest deduction | Can deduct up to $2,500 | No change |
Graduate student tuition waivers | Tuition waivers are not treated as taxable income | No change |
A big victory for families that send their children to private school. | ||
Education savings plans | None | Expands use of 529 college savings accounts to include K-12 private school tuition |
Deduction for classroom expenses | $250 deduction | No change |
Itemized deductions | ||
Some Republican representatives in high-tax districts have said they will vote “no” because of the scaling back of the “SALT” deduction. | ||
State and local tax deduction | Income or sales and property taxes are deductible | All state and local tax deductions limited to $10,000 |
Mortgage interest deduction | Can deduct interest payments on up to $1 million of debt | Limited to payments on $750,000 of debt |
Moving expenses | Can deduct personal expenses | Eliminates, except for members of the military |
Employer-provided expense reimbursements are excluded | Eliminates, except for members of the military | |
This deduction, which would have been eliminated by the House bill, is most important to low-income taxpayers with high out-of-pocket health care costs. | ||
Medical expenses deduction | Can deduct out-of-pocket expenses in excess of 10% of adjusted gross income | Expands by reducing threshold to 7.5% of income Applies to 2017 and 2018 |
Overall limit on itemized deductions | Phase out beginning at $266,700 / $320,000 (singles/couples) |
Repeals |
Other individual taxes | ||
This provision, estimated to save over $300 billion, would severely weaken the Affordable Care Act.
|
||
Individual mandate | Penalty for not having health insurance | Eliminates Starts in 2019 |
Estate tax | Top rate of 40% on estates above $5.6 million | Increases threshold to estates above $11.2 million |
Pass-through income | Taxed at individual rates | 20% deduction, phasing out starting at $315,000 of income for couples |
Capital gains | Top rate of 23.8% (including net investment income tax) | No change |
Corporate taxes | Current Law | G.O.P. Bill |
The largest tax cut in the bill would be permanent, as would other corporate tax changes. | ||
Top corporate tax rate | 35% | 21% |
Business interest deduction | Generally fully deductible | Caps deduction at 30% of income (excluding depreciation) |
The Senate’s decision to keep the corporate A.M.T. was reversed after blowback from several industries.
|
||
Alternative Minimum Tax | Alternative income tax calculation for businesses | Eliminates |
New investment purchases | Complex rules for deducting over many years | Five years of full expensing, then phased out over five more years |
Section 179 expensing | Small business expensing limited to $500,000 | Increases limit to $1 million |
The bill raised money by speeding up the effective dates for these last two provisions, which were included in the Senate bill. | ||
Net operating losses | Can deduct net operating losses from income in other years | Limits the deduction to 80% of taxable income |
Research and development expenditures | Can be immediately deducted | Would need to be written off gradually |
Business credits and other | ||
Orphan drug tax credit | Credit for 50% of qualifed testing expenses | Reduces credit rate to 25% |
Renewable electricity tax credit | Credit for wind power production, phasing out by 2020 | No change |
Private activity bonds | Tax-exempt bonds used to fund low-income housing and other projects | No change |
International | ||
The bill would move from the current worldwide tax system, in which income earned abroad is taxed in the United States, to a territorial system in which only domestic profits would be taxed. | ||
Taxation of multinational companies | Worldwide system with deferral and credit for taxes paid abroad | Modified territorial system with new anti-abuse tax |
One-time repatriation tax | — | 8% (15.5% for cash) |
This original article appeared in the New York Times and was written by
On December 20, the House passed the reconciled tax reform bill, commonly called the “Tax Cuts and Jobs Act of 2017” (TCJA), which the Senate had passed the previous day. It’s the most sweeping tax legislation since the Tax Reform Act of 1986.
The bill makes small reductions to income tax rates for most individual tax brackets, significantly reduces the income tax rate for corporations and eliminates the corporate alternative minimum tax (AMT). It also provides a large new tax deduction for owners of pass-through entities and significantly increases individual AMT and estate tax exemptions. And it makes major changes related to the taxation of foreign income.
It’s not all good news for taxpayers, however. The TCJA also eliminates or limits many tax breaks, and much of the tax relief is only temporary.
Here is a quick rundown of some of the key changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.
Key changes affecting individuals
- Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
- Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025
- Elimination of personal exemptions — through 2025
- Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025
- Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018
- Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
- New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers) — through 2025
- Reduction to the mortgage debt limit for the home mortgage interest deduction, to $750,000 ($375,000 for separate filers), with certain exceptions — through 2025
- Elimination of the deduction for interest on home equity debt — through 2025
- Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) — through 2025
- Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025
- Elimination of the AGI-based reduction of certain itemized deductions — through 2025
- Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025
- Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year
- AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025
- Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025
Key changes affecting businesses
- Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
- Repeal of the 20% corporate AMT
- New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets —effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
- Other enhancements to depreciation-related deductions
- New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
- New limits on net operating loss (NOL) deductions
- Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
- New rule limiting like-kind exchanges to real property that is not held primarily for sale
- New tax credit for employer-paid family and medical leave — through 2019
- New limitations on excessive employee compensation
- New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
Year-end planning opportunities still available
We’ve only briefly covered some of the most significant TCJA provisions here. There are additional rules and limits that apply, and the law includes many additional provisions.
Also keep in mind that, as a result of the TCJA, you may have some last-minute year-end 2017 tax planning opportunities — but quick action (before January 1, 2018) will be needed. If you have questions about what you can do before year end to maximize your savings, or you’d like to learn more about how these and other tax law changes will affect you in 2018 and beyond, please contact us.
This original article can be found here: http://www.extendedarticle.com/TAA/247496_Mauldin_Jenkins/2017/ETRA17_fullarticle_MJ.html
While Congress bickers over a tax reform package, the rest of us are left to make sense of end-of-year tax planning.
Since we don’t know the outcome and reforms would most likely not take effect until 2018, focus on the things within your control today.
Maximize contributions to a 401(k) or 403(b) plan. These payroll deductions will immediately lower your taxes and put money away in a tax-deferred manner.
Contributions may be met by matching contributions from an employer. A match is free money. However, since they must run through your paycheck, contact your payroll department now.
Convert a traditional IRA to a Roth IRA. By converting to a Roth, you are moving money from a tax-deferred account to one that is tax-exempt. The younger you start, the easier it is to get started and benefit from the tax exemption.
Many investors worry they make too much money to contribute directly to a Roth IRA. However, wise investors know there are no income limits on Roth conversions. As such, analyze how much income tax you are willing to pay now to receive tax-exempt growth going forward.
Furthermore, a Roth IRA does not impose “Required Minimum Distributions” on investors who are 701/2
Although not a tax benefit, qualified retirement plans can also provide creditor protection and can be left to heirs in a tax-advantaged manner.
A Health Savings Account also delivers an immediate income tax deduction. An HSA allows you to invest money in a tax-deferred manner, allowing for long-term growth. If earnings are used for qualified health expenses, they can be withdrawn in a tax-exempt manner.
Although you must have a high-deductible health insurance policy to use an HSA, the long-term compounding of this alternate investment plan can really pay off in lowering current taxes as well as future medical expenses.
Harvest investment losses. If you sell a negative position, you realize a tax loss that can offset up to $3,000 of income for joint tax filers. However, losses can offset an unlimited amount of capital gains. Unused losses can be carried forward indefinitely.
When using tax losses, make sure not to violate the “wash-sale” rule.
Contribute to an education fund such as a 529 college savings plan or Education Savings Account. A 529 plan can receive up to $70,000 per beneficiary from one person this year. An ESA can receive up to $2,000 per year, and the earnings are tax-exempt if used for qualified education expenses.
Supercharge your charitable donations. Obviously, charities are happy to take your cash, but they will gladly accept appreciated securities also. If you gift appreciated securities, you don’t pay taxes on the deferred gain but receive the full benefit of the market value as a donation.
Those who are at least 701/2
Charitably inclined people can also transfer appreciated stock to someone in a lower income tax bracket, such as a grandchild. When the grandchild sells the stock, they will pay capital gains tax but most likely at a much lower tax rate.
Lastly, you can accelerate deductible expenses that are not due until next year. By doing so, you “bunch” deductible expenses such as property tax, mortgage interest, medical expenses or charitable expenses. Effectively, you will have large deductible expenses in one year followed by very little the next year. This allows you to better use itemized deductions one year followed by the standard deduction in the next year.
With less than one month left in the year, a little bit of planning and strategy can go a long way toward lowering your 2017 tax bill. Finally, what you earn this year does not matter. What does matter is what you earn net of taxes.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.
This original article was written by
House Republicans released a bill on Thursday that would make major changes to the tax code. Some key elements of the proposal:
Lower Rates for Households
The bill would reduce the current marginal income tax brackets to four from seven — 12, 25, 35 and 39.6 percent — and lower taxes by increasing the income ranges affected by each rate.
The top rate would be the same as it is now, except the income level at which it would apply would increase to $1 million for married couples from $480,050 under the current law.

While the lowest income rate would increase, typical families in the existing 10 percent bracket would most likely be better off because of a larger child tax credit and an increase in the standard deduction. The full effects of the plan on different groups has not yet been analyzed by experts.
The bill would repeal the individual Alternative Minimum Tax — which primarily affects households with incomes from $200,000 to $1 million — and would maintain preferential rates for investment income. It would also repeal the estate tax after six years, in the meantime doubling the amount of inherited wealth that is exempt from the tax to $11 million from $5.5 million.
Increase the Standard
Deduction and Child Tax Credit
The plan would nearly double the amount of the standard deduction and eliminate the personal exemption, a deduction based on the number of taxpayers and the dependents claimed on a return.
The new, single deduction would be higher for many filers, except those who claim multiple children. An increase in the child tax credit to $1,600 from $1,000 and a new $300 credit for each parent and nonchild dependent could make up the difference.
Filing status | Current deduction | Current deduction & exemptions | Deduction under G.O.P. bill |
---|---|---|---|
Single, no children | $6,350 | $10,400 | $12,000 |
Married, no children | $12,700 | $20,800 | $24,000 |
Married, two children | $12,700 | $28,900 | $24,000 |
Filers can choose the standard deduction or itemized deductions, but not both. Most filers — 70 percent — currently choose the standard deduction because it is higher than what they qualify for in itemized deductions.
According to an analysis of an earlier House Republican tax plan by the Tax Policy Center, 84 percent of filers who currently itemize their deductions would take the standard deduction if it were doubled.
To help pay for the increase, the plan would eliminate other deductions, with the exception of deductions for mortgage interest, charitable contributions and state and local property taxes. The mortgage interest deduction would be capped for newly purchased homes up to $500,000, and the property tax deduction would be capped at $10,000.
Eliminate the State and Local Tax Deduction
The biggest deduction that would be eliminated is the one for state and local taxes. That deduction primarily helps people in blue states where taxes are higher.
Republicans made a last-minute change to the bill that would retain some of the property tax portion of the deduction, but many upper-middle class taxpayers in these places could still end up paying more under the bill.
But the political divide is not so straight-forward. A Tax Policy Center analysis in September found that of the 20 congressional districts with the highest percentage of returns claiming the deduction in 2014, eight had Republican representatives.
Create a New Tax Rate For ‘Pass-Through’ Businesses
The plan would create a new 25 percent tax rate for “pass-through” businesses — sole proprietorships, partnerships and S corporations that currently pay taxes at the individual rate of their owners. Pass-throughs now make up about 95 percent of businesses in the country and the bulk of corporate tax revenue for the government.
Most pass-throughs are small sole proprietorships currently paying less than a 25 percent marginal rate. But a few are quite large — 1.7 percent of pass-through businesses generate more than 40 percent of all pass-through income and are taxed at the top 39.6 percent rate.
The bill includes a rule to help prevent wealthy individuals from incorporating as pass-through companies to pay a lower tax rate on their income. As a result, certain personal service businesses like law, accounting and consulting would not be eligible for the rate.
Lower the Corporate Rate While
Eliminating Some Tax Breaks
The plan would lower the corporate tax rate to 20 percent from 35 percent and eliminate most business deductions and credits, with the exception of those for research and development and low-income housing. Cutting this tax rate is the most expensive change in the bill.
A recent analysis by the Tax Foundation found that eliminating these corporate tax expenditures that do not change the structure of the tax code would only pay to lower the rate to 28.5 percent from 35 percent, far short of the 20 percent rate called for in the bill. Because the bill calls for retaining some expenditures, even more savings will have to be found elsewhere to pay for the corporate tax cut.
The plan also makes several other major changes to the corporate tax code, including allowing temporary immediate expensing of assets, scaling back deductibility for corporate interest expenses, moving to a territorial system and implementing a one-time repatriation tax on profits overseas.
Stocks continue to rally while no major legislative accomplishments come out of Washington D.C. Markets prefer gridlock over sweeping policy changes, particularly changes that affect property rights, so this is no surprise. Really, the fact that no major legislation has passed is a positive economic event in and of itself.
However, the calculus changes when it comes to tax reform as compromise could occur in this area. If so, major winners could emerge with a streamlined tax code that lowers effective tax rates for most individuals and corporations.
Tax reform is still a big “if”, but even some minor change seems more likely than not. In preparation, investors might consider screening their portfolios and the market for sectors and companies that could benefit from lower rates. This is something we do for clients using our databases, software, models and unbiased research powered by Zacks Investment Research.
A Quick Look at Proposed Changes
This column focuses on how tax reform could impact corporate America, so we’ll look at proposed corporate tax code changes. Here’s a quick summary of what’s on the table:
- Drop the top rate for small businesses to 25% (currently small businesses are generally taxed at the individual level)
- Lower the corporate tax rate from 35% to 20%
- Repeal the corporate alternative minimum tax
- As an incentive to increase business investment, allow businesses to immediately write off the cost of new investments over five years
- Partially limit interest deductibility
- Keep the research and development tax credit, along with the low-income housing credit
Who Might Benefit?
Let’s focus on the lower corporate tax rate. If that were to pass, we could technically screen companies based on their effective tax rates. If we did that, we would take a close look at those companies with the highest rates, as they would arguably benefit most from a cut.
Another beneficiary could be small-cap indexes, for a couple of reasons. First, regional and small banks make up a significant percentage of domestic small-cap indexes, and tend to have high average tax rates. Second, small-cap stocks tend to be more domestic-oriented companies, meaning they generate a higher share of their revenues in the U.S. versus abroad. It follows that since last year’s Presidential election, a basket of high tax banks has outperformed the S&P 500.
Companies with large shares of profits overseas could also see a major benefit from tax reform, assuming a repatriation clause is included in the new law (providing incentive to move some overseas profits back to the U.S.). This would knock out their tax liability and provide an influx of cash for buybacks, dividends, and/or capital expenditures which could boost shares.
Bottom Line for Your Clients
There is largely a consensus among Republicans on the need for tax reform, but how to accomplish it is a different story. For example, the original House Republican plan called for using a border adjustment tax to generate revenue needed to finance lower rates for other sectors. Many Republicans and analysts viewed this favorably, but the idea was essentially nixed by two Senators from Arkansas (the home state of Walmart). The point is: tax reform is more complicated than most think, and the process could get ugly.
That being said, we believe there is a relatively strong possibility of some law passing, so it could make sense for investors to position their portfolios accordingly.
This original article was sent to us by Mitch Zacks.
Mitch is a Senior Portfolio Manager at Zacks Investment Management and has published two books on quantitative investment strategies. Mitch has a B.A. in Economics from Yale University and an M.B.A in Analytic Finance from the University of Chicago.
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This original article was written by Maria LaMagna for MarketWatch.com
Here’s a good reason to file your taxes early this year.
The data breach at credit bureau Equifax that may have affected 143 million U.S. adults could have lasting effects — including at tax time. If hackers gained access to the information on consumers’ credit reports, including their Social Security numbers, credit card numbers and driver’s license numbers, they could open credit accounts in consumers’ names, security experts have said.
To guard against that, the Federal Trade Commission warned consumers Friday to file their taxes early — “as soon as you have the tax information you need, before a scammer can.” Tax scams are already a problem. They have caused “thousands of people” to lose “millions of dollars and their personal information,” according to the Internal Revenue Service.
The IRS doesn’t initiate contact with taxpayers by email, text message or social-media channels to request information, the agency states on its website, and taxpayers should not turn over information to anyone who contacts them in those ways. But the IRS does mail letters to taxpayers, and the FTC warned consumers to respond to any letters they receive right away.
In a statement issued late Friday, the agency said, “The IRS is currently reviewing and assessing this serious situation to determine necessary next steps.”
This original article was written by ,
With the beginning of summer just around the corner, chances are that you’re not thinking about your 2017 taxes – but you should be. The beginning of summer is a great time to take stock of your financial picture and make any necessary changes. Why? You have a number of 2017 pay periods under your belt and you’ve had several months to work through any changes from 2016. A quick review now can save hundreds (or thousands) of dollars in taxes later.
Here are seven things you can do right now to save on taxes this year:
1. Review last year’s tax return. It’s tempting to just simply toss your tax return in a pile right after Tax Day. And that’s okay for a few weeks. But before you get too comfortable with your tax return in the filing cabinet, pull it out and take a second look. Check your return for errors: you can always file an amended return if you’ve left something out. If any deductions, such as your charitable deductions, were disallowed because of a lack of documentation, etc., make a mental note to get it right this year. If you owed taxes last year, think about how you can reduce the hit at the end and eliminate any potential penalty; if you were owed taxes last year, consider tweaks to your withholding (keep reading) to get that money back during the year instead of all at one time. Finally, if you’ve had any significant changes in circumstances since last year, you’ll want to consider how that might affect your overall tax picture; such changes would include changes in your personal life (such as marriage, divorce, or a new baby), job situation (including a new or second job, raise, or change in hours), or financial picture (like an inheritance, theft, or loss).
2. Double check your retirement contributions. Making contributions to retirement accounts is an easy way to save for the future and get an immediate tax break since deductions may be deductible or excludable. Think you can’t afford it? Think again. Let’s say you make $50,000 per year. By opting for a 1% contribution rate, you’re moving $500 per year to a tax-deferred account; if your employer offers a match, you’re moving $1,000 per year to a tax-deferred account. That money isn’t subject to tax now which means that at a 25% marginal rate, you’re deferring $125 in tax ($250 if you count the employee match) – plus, it grows tax-free until retirement. While $500 might feel like a big hit to your wallet all at once, if it’s automatically debited each pay period, you likely won’t miss it since it works out to just $42 each month. The more you stash away now – without paying taxes on that money today – the more you’ll have for retirement later.
3. Make sure that you’re taking your proper retirement withdrawals. Most taxpayers are aware that they are subject to a penalty if they withdraw money too early from certain retirement accounts but did you know that you can also get hit with a penalty for withdrawing money too late? By law, you are required to withdraw funds from certain retirement accounts each year after you reach age 70½ (or the year in which you retire if you retire after that age). That amount is referred to as a required minimum distribution (RMD). Failure to make those RMDs can leave you with a penalty come tax time. To avoid the hit, make sure that you’re making those withdrawals on time. The rules can be tricky – different rules apply to inherited or estate retirement accounts, for example – so be sure to consult with your financial advisor if you have questions.
4. Fund or top up your Health Savings Account (HSA) or Flexible Spending Account (FSA). Medical costs feel like they keep going up – and with a recent adjustment to the floor for medical expenses (you must itemize on a Schedule A and your deductible medical expenses are only those that exceed 10% of your adjusted gross income (AGI) to claim), it’s less likely that you can take advantage of the medical expense deduction. To help with those costs, consider funding a savings plan for health care now so that you can sock away money to pay expenses on a pre-tax basis for the rest of the year (the HSA can also roll over to next year). If your employer offers a flexible spending account (FSA), you can put aside pre-tax dollars to be used for qualifying medical expenses, including insurance copays and deductibles. Consider a health savings account (HSA), too, since the payment of qualified medical expenses from your HSA is federal income tax-free and you don’t need to have an employer-sponsored plan. Putting away just $1,000 to help with medical expenses could save the average individual taxpayer $250 in taxes (25% of $1,000). Of course, the more you can put away, the money that you can save, subject to certain limits: those limits are set each year by the IRS and are available here.
5. Make changes to your W-4 or consider changing your withholding. The form W-4 is the form that you complete and give to your employer – not the IRS – so that your employer can figure how much federal income tax to withhold from your pay. You typically fill out a form W-4 when you start a new job or at the beginning of the year. However, you may also want to fill out a new form W-4 when your personal or financial situation changes (see #1). Generally, the more allowances you claim on your W-4, the less federal income tax your employer will withhold from your paycheck (the bigger your take home pay) while the fewer allowances you claim, the more federal income tax your employer will withhold from your paycheck (the smaller your take home pay). You want to get this number right since if you owe too much at tax time, you could be subject to an underpayment penalty.
(For more on making changes to your W-4, check out this prior article.)
6. Review your estimated payments. If you receive payments or other money throughout the year without having any federal income taxes withheld, you should consider making estimated payments. If you are filing as an individual taxpayer, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your federal income tax return. This rule applies not only to the self-employed or occasional freelancers but also to those taxpayers who may receive income from other sources not subject to withholding; these tend to be landlords, S corporation shareholders, partners in a partnership or taxpayers with significant investments. To make estimated payments, you’ll figure your estimated tax; you can use the worksheet on the federal form 1040-ES (downloads as a pdf) to figure your estimated tax. For estimated tax purposes, the year is divided into four payment periods, about once every quarter. Each period has a specific payment due date as determined by IRS (usually April 15, June 15, September 15 and January 15). Watch the dates carefully: if you don’t pay on time, you may be subject to a penalty.
7. Make an appointment to see your tax professional. Believe it or not, not all tax professionals close up shop once Tax Day passes: there is work to be done all year long. That said, many tax professionals have a bit of lull in June and July (things often pick up closer to the date that extended returns are due) which makes it a good time to make an appointment. If you manage a small business or run your own show, you should likely be meeting with your tax professional quarterly – just to make sure that you’re on top of things. Most individual taxpayers who don’t run a business find that a quick check-up once a year works out just fine to make sure that you won’t encounter any nasty surprises at year-end: a tax professional can also help you determine whether you need to make a change in your withholding or pay more (or less) in estimated payments. Don’t assume that hiring a good tax pro will be complicated or expensive. Pricing is important but don’t hire just on cost: ask questions and get a referral from a friend. Another plus? Fees for tax advice are generally deductible.