Five ways to take advantage of 2017 tax savings
With the April tax filing deadline past, it can be easy to put your mind off taxes until next tax filing season. Before you do, review your financial situation to see if you could benefit from early tax planning. A small organization today can help you reduce your 2017 tax burden. Review the five considerations below to see if the payments or contributions you make this year could help you achieve tax savings:
1. Withdrawal from contribution plan
If you participate in a retirement plan through your employer, such as a 401(k) plan, consider maximizing pre-tax contributions to the extent you can afford. In 2017, you can contribute up to $18,000 in pre-tax dollars to a workplace retirement plan, or $24,000 if you’re age 50 or older. Those dollars are deducted from your income before taxes are calculated, so you reduce your taxable income while building savings for the future.
If a workplace plan is not available or if you want to save additional income for retirement, you may consider depositing up to $5,500 a year in an Individual Retirement Account (IRA). You can contribute up to $6,500 to an IRA if you are age 50 or older. For traditional IRAs, you may be able to deduct those contributions from your current income; however, those dollars will be taxed when withdrawn.
2. home ownership
Many Americans reduce their tax burden by using deductions related to home ownership. Interest payments you make on your home loan, as well as property taxes, can be deducted from your income (if you itemize deductions). Also, if you paid any interest upfront in exchange for a lower rate on your home loan (also known as payment points), you may be eligible for additional tax breaks.
If you plan to make any changes to your housing situation this year, it’s important to consider how your taxes may be affected before you make any major moves. Downsizing as part of your retirement plan or buying a vacation home, for example, can have tax implications. Consult with a tax advisor to learn more about how your current or future housing situation could affect your taxes.
3. University education
There are several savings options you can use if one of your financial goals is to help your children pay for college. Common options include Coverdell Education Savings Accounts, Uniform Transfers to Minors Act (UTMA) accounts, Uniform Gifts to Minors Act (UGMA) accounts, tax-exempt savings bonds, and 529 plans.
529 plans are a common tax-advantaged savings option because they are specifically designed to help families save for higher education. Contributions are not federally tax deductible (but may be in certain states), however your earnings can grow tax-free. You won’t pay taxes at the federal level (and in most cases at the state level) when the money is withdrawn for qualified higher education expenses. Keep in mind that there are advantages and disadvantages to each college savings option, and each may affect your current financial situation and your child’s eligibility for financial aid differently.
When it’s time to pay for tuition and other college expenses, you may qualify for one or more tax breaks. If you pay qualified higher education expenses for yourself, your spouse, or a student in the first four years of attending a postsecondary school, you can claim up to $2,500 in tax credits. Unlike a tax deduction that reduces taxable income, a tax credit reduces your tax liability dollar for dollar. The American Opportunity Tax Credit is a valuable education-related tax-savings strategy, but there are others as well.
4. Work-related moving expenses
For most of us, tax savings are not a reason to look for a new job. However, you may qualify for some tax savings if you find yourself with a different employer this year. Generally, the expense of looking for a new job is not tax deductible. However, if you are seeking a position in the same field of work, the expenses may be deductible as a miscellaneous itemized deduction. (Taxpayers can only take miscellaneous itemized deductions to the extent they add up to and exceed two percent of their adjusted gross income.) your new job is from your old place of employment, you may be able to deduct moving costs. Expenses that can be deducted include the costs of using a moving company, transporting items yourself, and traveling to a new residence.
5. solar energy installation
Although a wide range of energy tax credits expired at the end of 2016, one is currently available for the cost of installing solar power and hot water heating at your primary or secondary residence. If you are considering this option, please consult your tax advisor to discuss the details of the tax credit, including qualification requirements and amount.
Important tax reminder
The tax strategies and deductions available to you may vary based on your income and other circumstances in a particular year, and are not limited to the categories mentioned here. Consult with an accountant before adjusting your tax strategy.