You wouldn’t pay extra money on your monthly electricity bill for no reason, would you? Of course not. So why should you have to pay extra money on your taxes every year?
Fortunately, there are ways you can save on taxes this year to help relieve the burden you usually feel once you see how much you owe Uncle Sam.
Noel Dalmacio is a CPA with his own firm, Dalmacio Accountancy corporation, and the author of several books on taxes. He explains that both the new House tax bill and the Senate measure calls for the elimination of most itemized deductions (that is Form 1040 Schedule A Itemized deductions).
“If they finalize the tax proposal in December 2017, it won’t take effect until the 2018 tax year,” he says. “However, we still need to plan since it could affect some of your 2017 year-end tax moves.”
So here are 10 tax-saving secrets you need to know before filing your taxes.
10 tips to reduce your taxes this year
While it’s illegal to avoid paying your taxes, it’s smart to avoid overpaying your taxes. Dalmacio and other experts share tips on how you can legally put less in Uncle Sam’s pocket and more in your pocket.
After all, it is YOUR hard-earned money to keep, isn’t it?
Some of these need to be done before the end of 2017 to reap the benefits. Others are changes you can make any time to improve your tax bill.
Tax Tip #1: Pay your state taxes early
Delmacio says, “If you live in a state that taxes salary and wage income, you need to pay your state taxes as much as you can this year while they’re still deductible.
If you live in a state that taxes salary and wage income, you need to pay your state taxes as much as you can this year while they’re still deductible.
A great way to do this is to make your final state estimated tax payments before the year-end. However, watch out for alternative minimum tax (AMT) since it will add back your prepayments for AMT purposes, which will negate the tax savings.”
Tax Tip #2: Pay your real estate taxes early
“The House bill is allowing up to $10,000 of real estate tax deduction. If your property tax bill is higher than that, then pay it in December instead of early next year to avoid losing some deductions,” says Delmacio. However, once again, he advises you to watch out for alternative minimum tax (AMT) for the same reasons stated above.
Tax Tip #3: Prepay your January mortgage
“The increased standard deduction amounts could make your mortgage interest deductions irrelevant,” explains Delmacio.”So, by prepaying your January mortgage in December, it will increase your deductible mortgage interest for 2017.”
Tax Tip #4: Bunch medical expenses
If you had a challenging year as far as your or family members’ health, this is the year to make sure you don’t waste any expenses, says Delmacio. “So, in addition to year-end doctor and dental visits, make sure you don’t overlook other possible medical deductions. And if you are scheduled for a major surgery next year, I would recommend doing it before year-end.”
Tax Tip #5: Bunch miscellaneous expenses
If you are an employee, make sure you deduct all job expenses that weren’t reimbursed, advises Delmacio. “Also, don’t forget to deduct things such as job search costs.”
Tax Tip #6: Donate to your favorite charities
If your other itemized deductions are gone, and the standard deduction amount is increased, you might not have enough in donations to file a Schedule A form. So, consider increasing or doubling up your donations this year when you can still claim the deductions.
Tax Tip #7: Go back to school
Brent Dickerson, owner and financial planner for Trinity Tax Advisory, jokes that the best way to save on taxes is to earn less income. But since that typically isn’t anyone’s goal, he offers more practical advice like going back to school. Dickerson says that education expenses, such as tuition and fees, can be deductible.
Tax Tip #8: Contribute to your retirement
Dickerson says contributions to a traditional IRA or other retirement plan sponsored by an employer, like a 401(k), can reduce your taxable income. “These contributions are often deductible,” he says, “but be careful, because they might be taxed in retirement upon withdrawal.”
Tax Tip #9: Buy a home
The interest you pay on the mortgage is typically tax deductible, as are any points you may have bought to reduce your interest rate, says Dickerson. “So too can be the taxes paid to local and state governments if they are based on the value of your home.”
Tax Tip #10: Don’t overlook one-time deductions
Most people know about annual deductions, such as state income and local real estate taxes, because they happen every year.
But less frequent deductions can be valuable, says Benjamin Sullivan, client service and portfolio manager with Palisades Hudson Financial Group in Austin, Texas.
Here are a few tips Sullivan suggests considering:
Casualty, disaster, and theft loss deduction
Theft, fire, or other loss? You may be eligible for the casualty, disaster, and theft loss deduction.
“First, calculate the loss incurred from each casualty or theft event that occurred during the year, [then subtract any] salvage value, insurance, or other reimbursements. Then, subtract $100 per event. Now you have your net loss. You are allowed to deduct the net losses that exceed 10% of your adjusted gross income,” says Sullivan.
Note that the $100 deduction applies to each casualty or theft loss, regardless of how many items were lost.
Non-business energy property credit
Homeowners who made qualified energy-efficient improvements — like adding insulation, energy-efficient exterior windows and doors, and certain roofs — may be able to claim credit for 10% of the associated costs, excluding installation costs.
“However, installation costs for certain high-efficiency heating systems, air-conditioning systems, and water heaters and stoves that burn biomass fuel can be deductible. There’s a lifetime limitation of $500, of which only $200 may be used for windows,” explains Sullivan.
Residential energy efficient property credit
Sullivan explains that homeowners who make energy-efficient improvements to their primary residences can reduce their taxes by 30% of the cost of the qualified alternative energy equipment installed on or in their homes.
“Solar water heaters, solar electric equipment, and wind turbines are. Unlike some credits, there is no dollar limit for most types of property, and any unused credit can be carried forward to the following year’s tax return.”
Sullivan says the benefits for adoption include both a tax credit for qualified child adoption and exclusion from income for employer-provided adoption assistance.
Plan your taxes the right way
There’s no reason you should have to pay more in taxes than what you owe. So, don’t assume something isn’t deductible. Find out for certain, advises Sullivan.
“The tax code is long and complex. Before you decide an expense isn’t (or is) deductible, check with an expert. If you use a tax preparer, ask him or her. If you do your own return, you should make sure your advice is coming from a reliable source such as the IRS website.”
Start by comparing tax preparation firms side-by-side to find the best one for you.
If your tax situation is a little more severe (i.e., you owe the IRS more money than you make), look into the IRS Tax Debt Forgiveness Program first.
You work hard every year for your paychecks. You deserve to keep more of it. These 10 tax-saving tips will make that possible for you in 2018.