Have you begun to prepare for next tax season? If you’re like most people, you’re probably looking forward to relaxing this summer and not thinking about your 2017 taxes. Although the filing season for 2017 is quite a way off, it’s a good idea to look at information to help save money. In an article from Forbes.com, Kelly Phillips provides us with 7 tips on how you can stay ahead of schedule and start saving money on taxes this year.
The beginning of summer is a great time to take stock of your financial picture and make any necessary changes. Why? You have a number of 2017 pay periods under your belt and you’ve had several months to work through any changes from 2016. A quick review now can save hundreds (or thousands) of dollars in taxes later.
Here are seven things you can do right now to save on taxes this year:
1. Review Last Year’s Tax Return. It’s tempting to just simply toss your tax return in a pile right after Tax Day. But before you get too comfortable with your tax return in the filing cabinet, pull it out and take a second look. Check your return for errors: you can always file an amended return if you’ve left something out. If any deductions, such as your charitable deductions, were disallowed because of a lack of documentation, etc., make a mental note to get it right this year. If you were owed taxes last year, consider tweaks to your withholding to get that money back during the year instead of all at one time. Finally, if you’ve had any significant changes in circumstances since last year, you’ll want to consider how that might affect your overall tax picture; such changes would include changes in your personal life (such as marriage, divorce, or a new baby), job situation (including a new or second job, raise, or change in hours), or financial picture (like an inheritance, theft, or loss).
2. Double Check Your Retirement Contributions. Making contributions to retirement accounts is an easy way to save for the future and get an immediate tax break since deductions may be deductible or excludable. Think you can’t afford it? Think again. Let’s say you make $50,000 per year. By opting for a 1% contribution rate, you’re moving $500 per year to a tax-deferred account; if your employer offers a match, you’re moving $1,000 per year to a tax-deferred account. That money isn’t subject to tax now which means that at a 25% marginal rate, you’re deferring $125 in tax ($250 if you count the employee match) – plus, it grows tax-free until retirement. While $500 might feel like a big hit to your wallet all at once, if it’s automatically debited each pay period, you likely won’t miss it since it works out to just $42 each month. The more you stash away now – without paying taxes on that money today – the more you’ll have for retirement later.
Quick note: not all retirement plans are tax-deferred. If you opt for a Roth IRA or other retirement account, you’ll pay the tax now, but your money will grow tax-free forever.
(You can check out the 2017 tax rates here.)
3. Make Sure That You’re Taking Your Proper Retirement Withdrawals. Most taxpayers are aware that they are subject to a penalty if they withdraw money too early from certain retirement accounts but did you know that you can also get hit with a penalty for withdrawing money too late? By law, you are required to withdraw funds from certain retirement accounts each year after you reach age 70½ (or the year in which you retire if you retire after that age). That amount is referred to as a required minimum distribution (RMD). Failure to make those RMDs can leave you with a penalty come tax time. To avoid the hit, make sure that you’re making those withdrawals on time. The rules can be tricky – different rules apply to inherited or estate retirement accounts, for example – so be sure to consult with your financial advisor if you have questions.
4. Fund Or Top Up Your Health Savings Account (HSA) or Flexible Spending Account (FSA). Medical costs feel like they keep going up – and with a recent adjustment to the floor for medical expenses (you must itemize on a Schedule A and your deductible medical expenses are only those that exceed 10% of your adjusted gross income (AGI) to claim), it’s less likely that you can take advantage of the medical expense deduction. To help with those costs, consider funding a savings plan for health care now so that you can sock away money to pay expenses on a pre-tax basis for the rest of the year (the HSA can also roll over to next year). If your employer offers a flexible spending account (FSA), you can put aside pre-tax dollars to be used for qualifying medical expenses, including insurance co-pays and deductibles. Consider a health savings account (HSA), too, since the payment of qualified medical expenses from your HSA is federal income tax-free and you don’t need to have an employer-sponsored plan. Putting away just $1,000 to help with medical expenses could save the average individual taxpayer $250 in taxes (25% of $1,000). Of course, the more you can put away, the money that you can save, subject to certain limits: those limits are set each year by the IRS and are available here.
In the following blog post, we’ll be covering a few more tips so you can be equipped with the right knowledge for next tax season.
Kelly Phillips attended law school and interned at the estates attorney division of the IRS. She has written many tax-related articles and two books while also she running her own website Taxgirl.com. She currently is working full time as a Senior Editor for Forbes.com.