Year-End Tax Tips for 2017: Part I
In an effort to improve your tax situation for 2017, there are a number of tax-savings steps to consider. The following list contains general considerations, although they might not all apply to your individual tax situation. Given pending legislation, some of the considerations listed below may not be available, and thus, the list should in no way be considered legal or tax advice based on your individual tax situation.
If you have questions regarding any of the tax-saving ideas listed in this article, please consult your legal or tax professional.
Tax Saving Considerations for 2017:
1) Reducing Adjusted Gross Income
Your Adjusted Gross Income (“AGI”) plays an important role in your life; both tax related as well as outside. For example, while AGI is used to calculate tax liability, many banks will also look at a person’s AGI in evaluating applications. An AGI is an important measure of a person’s finances.
Taking steps to reduce your AGI may minimize the amount of tax you owe at the end of the year. Some strategies to reduce your AGI include:
- Contribute to a 401(k) or increase your contributions to your 401(k).
- Contribute to a health savings account (“HSA”).
- Defer receipt of a year-end bonus until the following year.
- Take unrecognized capital losses to offset capital gains and $3,000 of ordinary income (if capital losses exceed capital gains).
2) Taking Advantage of Deductions and Credits
A tax deduction (generally) is an amount permitted to be deducted from your income prior to figuring out the amount of tax you owe. Therefore, the benefit of a deduction is generally equal to the percentage of your tax bracket.
Tax credits on the other hand reduce dollar-for-dollar the amount of tax you owe. This can be in the form of a refundable tax credit or a non-refundable tax credit. A nonrefundable credit only reduces the tax you owe, while a refundable tax credit means you get the full benefit of the credit even if it is more than the tax you owe.
Making the most of available deductions and credits can help reduce the tax liability at the end of the year.
Some of the more common deductions include:
- Mortgage interest, private mortgage insurance, and real estate property taxes
- Student loan interest
- Charitable giving
- Health expenses, such as medical, dental and mental heath
- Job search expenses
- Tax deductions for the self-employed
Some of the more common tax credits include:
- Earned Income Tax Credit
- Child and Dependent Care Credit
- Child Tax Credit
- Lifetime Learning Credit (education)
- American Opportunity Credit (education)
3) Maximizing Retirement Account Contributions
If you have a traditional 401(k) and have not contributed the annual maximum amount, you may be able to reduce your 2017 earned income by making the maximum contribution of $18,000 to your 401(k) account, as long as you do so before the end of 2017. If you are at least 50 years old, you may contribute an additional $6,000. The tax savings depends upon each individual taxpayer’s income tax bracket.
As an example, if you contribute the maximum for 2017 as a taxpayer under age 50 and are in the 25% tax bracket, then there is a potential $4,500 tax savings. A taxpayer should consult with their tax preparer and financial advisor to determine the potential tax benefits.
A taxpayer saving for retirement with a traditional IRA may also reduce their taxable income for 2017 with contributions up to $5,500. If the taxpayer is at least 50 years of age then $6,500 is the cap.
A self-employed taxpayer may have additional options for reducing income taxes while contributing to a retirement account. One method is through the use of a SEP IRA (Simplified Employee Pension IRA). The taxpayer is able to contribute up to $54,000 or 25% of eligible income before taxes – the taxpayer may contribute the amount that is less. The money goes tax deferred like a traditional IRA. Be careful if you are subject to the alternative minimum tax before maximizing your retirement contributions. Seek professional advice from an experienced tax professional.
Unused annual gift exclusions permitted by the IRS cannot be carried over to the next year, so make your gifts before the end of the year.
Gifts to Individuals. Each taxpayer is able to gift $14,000 per donee (recipient of the donation) in 2017. These gifts can result in gift, estate, and income tax savings depending on the type of gift and the income tax brackets of the taxpayer and donee.
For example, if the taxpayer gifts to the donee an income-producing asset, there may be an income tax savings if the donee is in a lower income tax bracket than the taxpayer making the gift. It is crucial that the gift is completed before the end of 2017. If you are making a gift to an individual using a check, then ensure the rules have been met – urge the donee to cash the check before the end of 2017.
- Gifts to charity. Only taxpayers who itemize their deductions can claim deductions for their charitable contributions. The gift to the charity must be made in 2017 to receive the deduction for 2017. The taxpayer must make the gift to a qualified charity. Taxpayers can check the charity using the IRS link: https://www.irs.gov/charities-non-profits/exempt-organizations-select-check
5) Paying Disputed Taxes Now
Both accrual and cash basis taxpayers may deduct taxes you are disputing with the tax authority if paid in 2017, even though the dispute continues into 2018 or longer, and even if you succeed in the dispute. Keep in mind that merely the assessment of the tax is not sufficient to consider taking the deduction -- the tax must be paid. If you are in the midst of a dispute with the IRS, consult with your tax preparer to determine if it is beneficial for you to pay the disputed taxes in 2017 and take an appropriate deduction.