No one likes paying Uncle Sam – but a little effort early can save a lot of time, stress and money later.
Here are a few strategies courtesy of Nolo, Inc. Magazine, Investor Place, Intuit, Destiny Capital and The Motley Fool.
What are itemized deductions? And do you have them?
Medical expenses (employees) and miscellaneous deductions have thresholds to Adjustable Gross Income (AGI)—10% and 2% respectively. To meet thresholds, stock up on prescription medicines, glasses/contacts; have costly treatment (dental, elective surgery), and make home-health purchases. According to Nolo.com, increase miscellaneous deductions and charitable giving one year to make thresholds—then scale back the next (Fishman).
Take pictures of all your Financial Documents, Business Expenses, and Donations.
Just take pictures of documents and you won’t have to wade through paper for what you need. Sean Smith from Lehman College on Inc.com noted that documentation includes donations and professional-organization dues—also business expenses. (Smith, 2008)
Lower taxable income by contributing to your retirement funds.
Reduce your tax burden with retirement planning. Take dollar-for-dollar reductions if contributing to a 401(K) or Traditional IRA, recommended by the Turbo Tax team on Turbotax.com. Currently, contribute up to $18,000 ($24,000 if 50+) to your 401K and $5,500 ($6,500 if 50+) to a traditional IRA. If self-employed, contribute up to 25% of income or $54,000 to a SEP IRA. (TurboTaxTeam, 2017)
Sign-up for a high-deductible Health Plan.
A High Deductible Health Plan (HDHP) can reduce taxable income and provide tax-free savings. The money withdrawn for medical expenses is delivered tax-free! Like a 401(k) retirement account, the Health Savings Account (HSA) is yours to keep, and HSA investments grow tax-free. BUT—the high deductible probably makes economic sense if you’re NOT: pregnant/planning to be, have small children, a chronic medical condition, are 65 or older, take expensive drugs, have children playing contact/high-risk sports—and in great health. If you proceed, switch to a plan that qualifies for an HSA and then move money you save on insurance premiums into your HSA.
You might not realize these are deductible—so do some research before you lose them.
- Bake goods for charity or host a charity party/event? Deduct the cost of food.
- Have a hobby and sell what you make? Claim matching expenses like craft supplies.
- Pay for adult education? You may qualify for tax credits by deducting as a job/career expense. For self-employed, sole proprietors, that means Schedule C business-expense write-offs. For employees—claim these as an unreimbursed employee business expense. Caveat! That high-priced MBA won’t fly if the taxman thinks you’re getting it to get a new job!
- Deduct the cost of babysitters if this is to enable your unpaid recognized-charity volunteering.
- You have the choice to deduct either sales taxes or state income taxes from federal income tax. In a state without income tax, sales-tax deductions can really add up. Even if you pay state taxes, the sales-tax break might be worth declaring for large purchases (e.g. car or engagement ring).