With two and a half months left in 2017 current year tax liability is easier to estimate. Below are five tax saving tips.
1) Defer income
Normally for individuals, income is taxed in the year it is received. A way to decrease current tax is to defer it. W2 wages are not deferable, however, if you are expecting a bonus, that could potentially be deferred to next year. If you are a business owner who sends bills to your customers, you could wait until the end of the year to send them. The expectation when deferring income is that next year when the income is claimed you will be in a lower tax bracket.
2) Prepaying Expenses
Just as income is taxed in the year it is received, deductions are expensed in the year they are paid. A way to lower tax is to prepay deductions. Examples of these deductions are charitable contributions, property taxes, mortgage interest and medical expenses. Medical expenses will only help if you have met the 10% of adjusted gross income threshold. The expectations of prepaying expenses are that you will be in a higher tax bracket then expected for the following year.
3) Maximizing Retirement Contributions
A great way to lower income tax is by maximizing retirement contributions. The maximum contribution amounts allowed in 2017 for a 401(k) are $18,000 for individuals 49 and younger and an additional $6,000 if you’re 50 or older. The maximum for IRAs are $5,500 for individuals up to 49 and $6,500 for 50 or older. 401(k) deposits need to be made by December 31, 2017 and IRA deposits need to be made by April 18, 2018. To find out if you can qualify for an IRA deduction click here.
4) Take advantage of Capital Loses
If you have sold stocks and mutual funds that have a loss, those losses can help reduce any realized taxable gains. If the gains are less than the losses, $3,000 of the excess loss can be used to decrease other ordinary income. Anything above the $3,000 can be carried forward and be deducted in future years.
5) Tax Free Income
If you have unrealized capital gains you can realize those gains in the 15% tax bracket and pay 0% taxes. Carefully plan to make sure you don’t go over thresholds.
You may find yourself wondering why would anyone want to increase their current year liability. For someone that is expecting a large increase in income next year that would result in a jump in tax brackets, it would be worth saving their deductions for the higher tax bracket and pay the lower tax this year. No matter what direction you decide to go, if you need help finding the best options for you, consult with your local tax preparer.