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The last thing most people want to think about during the holidays is taxes, but you also don’t want to wake up on January 1 with regrets of the financial variety for not having taken action when you should have. Doing some end-of-year tax planning in 2017 will put you on a better financial footing for the new year.
Make Your Home More Energy Efficient
We all tend to put off home improvements that are not absolutely essential, especially at the end of the year when there are other demands on our cash. However, it may be worthwhile to find the funds to make certain improvements to your home’s energy efficiency. If your improvements qualify, you will be able to claim a significant tax credit—for as much as 30 percent of the home improvement’s cost. A tax credit is different than a tax deduction. While a deduction reduces the amount of your taxable income, a credit directly reduces the amount of tax owed.
Be sure that your home improvements comply with federal energy efficiency standards so that your outlay of cash qualifies for the tax credit. If you make qualified energy-saving home improvements by the end of 2017, you can claim a tax credit of up to 30% of the costs. The improvements must meet federal energy-efficiency standards in order to qualify for the credit. Learn more about requirements at the government’s Energy Star page.
Maximize Deductions in 2017
What the tax code will look like one year from now isn’t entirely clear, but it seems likely that, especially for those in higher tax brackets, income taxes are not likely to go up, and may very well come down. That means that the same deduction from taxable income could be worth more to you this year than it will next, so you would be smart to take advantage of as many deductions as possible in 2017. If lawmakers successfully increase the standard deduction and do away with many of the itemized deductions to which we’ve grown accustomed, such as that for state and local taxes (SALT), the benefit of itemizing may disappear.
How best to take advantage of deductions you may have for 2017? Pay state and local taxes for 2018 this year instead of next, if possible. If you are the parent of a college student for whom you are paying tuition, pay the bill that’s due in January before the end of 2017. That will enable you to take maximum advantage of the American Opportunity tax credit. This credit is worth as much as 100% of the first two thousand dollars spent on expanses that qualify, and up to 25% of the next two thousand dollars. Parents can get up to a $2,500 credit for each qualifying student, not overall.
Of course, charitable donations are always an excellent source of deductions. Consider accelerating donations you might have otherwise made in 2018, making them in 2017 to take advantage of tax deductions.
Defer Income Until 2018
Because of the likelihood that tax rates may decrease, any income you are able to defer receipt of until 2018 may be taxed at a lower rate. Self-employed individuals may have more control than most about when they receive income. For example, if you bill clients toward the end of December 2017, payments may come in in January, making them 2018 income. If you’re employed by a company, there may not be as much you can do to defer income; your paycheck will arrive on its usual schedule.
Because of the likelihood that tax rates may decrease, any income you are able to defer receipt of until 2018 may be taxed at a lower rate.
However, if you might be getting a bonus, it is possible you could request your employer to defer payment until 2018. That said, if your employer has already expressed an intention to pay bonuses in December, that check will count toward 2017 income regardless of when you receive or cash the check.
Take Required Minimum Distributions Wisely
If you are a retiree aged 70 1/2 or older, you must take required minimum distributions (RMD) from your retirement accounts. While there is no way around this if you want to avoid hefty penalties, you may still be able to structure your RMDs to minimize taxes. If, for instance, you turned 70 1/2 in 2017, you have until April 1, 2018 to take your first RMD, meaning it will be taxed in 2018 at potentially lower rates. However, you will then have to take a second RMD, for 2018, before December 31 of that year. Be sure you can afford to pay taxes on both RMDs in one year before opting for this strategy.
Even if you turned 70 1/2 before 2017, you still may be able to save tax on your distribution if you planned to withdraw more than the minimum required. Take your RMD in 2017, but defer the additional withdrawal until 2018.
Don’t Forget Tried-and-True Tax Savings Techniques
This may not be new advice for tax year 2017, but it can still save you money. As with previous years, contributing to a tax-favored retirement account in 2017 can lower your taxable income. These accounts include 401(k), 403(b), 457 and federal Thrift Savings Plans. You can contribute up to $18,000 in one of these plans, or $24,000 if you are over 50.
Contributions to a 401(k), 403(b), 457 or federal Thrift Savings Plan won’t be included in your 2017 taxable income. You can contribute up to $18,000 in your workplace plan, or $24,000 if you’re 50 or older. If you want to boost contributions from your last paychecks of the year, visit your payroll office ASAP. You have until April 17, 2018, to contribute to a traditional or Roth IRA for 2017.
If you have a child headed for college someday, consider a state-sponsored 529 college savings plan. 529 college-savings plans. You can’t deduct contributions to these state-sponsored plans on your federal tax return, but most states, including Michigan, allow deductions on state returns. A married couple can deduct up to $10,000 in contributions annually. So long as the earnings in a 529 account are used for educational expenses, they are tax-free.
These tips only scratch the surface of options for year-end ways to save money on taxes. To learn more, contact your attorney or tax professional.
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