With tax season in high gear, Americans are looking for ways to reduce their liabilities. 2017’s tax rules provide many methods, including tax deductions, tax credits, and IRAs. By taking advantage of these opportunities, taxpayers can save hundreds or even thousands on their tax bills.
Many taxpayers are looking for ways to increase their tax returns. In an economy where most families have high expenses, refunds count. Here are four key tips for increasing yours.
Utilize Tax Deductions
Some of the biggest tax deductions can be used to reduce your adjusted gross income (AGI). The AGI is what ends up on line 37 of your 2017 1040. You can take all the deduction opportunities listed before line 37 even if you don’t itemize deductions.
Reducing AGI is always important. The lower your AGI, the more likely you are to qualify for other tax deductions and credits, such as the medical expenses deduction, which is available as an itemized deduction if medical expenses exceed 10 percent of AGI.
Here are some AGI reducing deductions with no itemization required:
Business/Capital Gain Losses
To reduce AGI, one of the first questions to ask yourself is: do I have any business or capital gains losses? For instance, if you have a side hustle, be sure to factor in any expenses. If expenses exceed income, report the loss. Also, offset any capital gains with losses. If you have any property to sell at a loss, consider doing so before the tax year ends.
Out-of-Pocket Expenses for Teachers
Educators should keep track of any out-of-pocket expenses, as they are deductible in 2017.
Health Savings Account
Does your health care plan have a health savings account (HSA) feature? If so, you can reduce AGI by up to $3,400 for a single person and $6,750 if the health plan covers a family. The contributions never expire, so this money can be used years or decades in the future.
Moving for a Job
If you move for a job, track your expenses and complete form 3903. Your new job must be at least 50 miles further from your old home than your old job, and you must work at least 39 weeks of the 12 months after your move. Any reimbursed expenses are not deductible.
If you are self-employed or had a 1099 side job like driving for Uber, you are eligible to deduct half of your self-employment tax. Self-employment tax is like payroll tax, except the self-employed pay it themselves and half of it is deductible. Self-employed persons can also deduct their health insurance costs.
Any student loan interest you paid in 2017 is deductible. The limit stands at $2,500.
After Reducing Your AGI
With your AGI as low as it can go, it’s time to choose between itemized deductions or the standard deductions. This is simple math. Whichever gets you the lowest tax base wins, and that depends on how many itemized deductions you can take.
If you own a home, you are likely to itemize in 2017. Remember, you can take off mortgage interest, points, property taxes, and mortgage insurance premiums.
After you factor in home costs, be sure to deduct state income taxes. Also, test if you qualify for the medical expenses deduction, and remember that you must itemize to take unreimbursed employee expenses and charitable contributions.
Pay attention to refundable tax credits
Refundable tax credits are great because if they bring your federal tax all the way to zero and then some, you get the difference. Nonrefundable credits, on the other hand, can only bring your tax liability to zero. For example, taxpayer A qualifies for the Earned Income Credit (EIC), which is refundable. Taxpayer A’s federal tax before the credit is $200. His EIC is $500. He receives a check for $300.
Other refundable credits include the American Opportunity Credit, Child Tax Credit, Premium Assistance Tax Credit, and credit for excess Social Security tax withheld.
Maximize IRA Contributions
IRA contributions are deductible up to $5,500 and $6,500 for those aged 55 or older.
You can take the full deduction even if you are covered by a retirement plan at work, if your modified AGI is $62,000 or less. If your modified AGI ranges between $62,000 and $72,000, you can take a partial deduction. Taxpayers with incomes over $72,000 cannot take the deduction. For married taxpayers filing jointly, the full deduction limit is $99,000 and the partial deduction limit is $119,000.
Single taxpayers and married taxpayers with a spouse not covered by an employer plan face no income limits. Married taxpayers filing jointly with a spouse covered by a plan face an income limit of $186,000 for the full deduction and $196,000 for a partial deduction.
Taxpayers who exceed the income limits or who have more to invest in an IRA than the deduction allows should consider a Roth IRA. Roth IRAs provide no tax deduction, meaning that contributions are with after-tax dollars. However, the distributions, when taken after retirement, are tax free. The Roth IRA can provide a substantial savings boon during your retirement years.
Since contributions to traditional IRAs that exceed deductibility limits are after-tax dollars anyway, they are best diverted to a Roth IRA.
Check Your Filing Status
This one is easy to miss, but as we can see from the IRA contributions rules, it matters. In terms of IRAs, married filing jointly works far better than married filing separately. Head of household is often better than single, if you qualify. Widows and widowers also receive benefits for filing under that status.
It is important to check your filing status against your particular tax situation. With some careful comparisons, you can maximize your tax return.