The last day of the year is just around the corner, and if you’re someone who usually faces a tax bill in April, this is your last chance to lower your tax liability for 2017. Even though there are only a couple of weeks left in the year, there are lots of things you can still do. Here are 10 ways to reduce your 2017 Federal tax liability.
Donate to Charity
If you itemize, the IRS lets you claim a deduction for charitable donations, and even if you don’t itemize, you can usually claim a deduction on the state level. While it doesn’t necessarily make sense to make a $100 donation so you can save between $15 and $40 at time tax, you should keep the receipts if you plan to donate anyway.
Also, remember that gifts count as charitable donations. If you are “adopting” a family for Christmas or donating toys or food to charity, keep your receipts. The deduction also applies to used items. Clean out your closets, take the stuff to the local thrift store, get a receipt, and claim those amounts at tax time.
Contribute to a Retirement Account
If you put money in an Independent Retirement Account (IRA), you can deduct the amount of your contribution from your income on your tax return. As of 2017, the IRS allows you to deduct up to $5,500 in traditional IRA contributions if you are under age 50 and up to $6,500 if you are over age 50.
Note that you do not earn a tax deduction for contributions to Roth IRAs. This rule only applies to traditional IRAs.
As a bonus, you have until April 15 of next year to make contributions that get deducted from your 2017 income. If you have money sitting in savings, it can make sense to direct it to an IRA. Just make sure that you don’t obliterate your emergency funds.
Pay Bills Early
If you run your own business and use cash-based accounting, consider paying as many bills as possible right now. For example, if you make payments for all of your January bills in December, you can include those amounts as business expenses on your 2017 tax return.
Unfortunately, if your business uses accrual-based accounting, this approach doesn’t work.
Make Big Business Purchases Now
In this same vein, if you’re planning a big purchase for the beginning of next year, consider taking care of it before New Year’s Eve. That also gives you a nice deduction for 2017.
Buy Something That Qualifies for the Section 179 Deduction
In particular, you may want to take advantage of the section 179 tax deduction. Usually, when you purchase a significant asset for your business, you have to write it off incrementally over time, but under Section 179 of the Internal Revenue Code, you can write off the whole expense at once.
Section 179 applies to software, vehicles for your business, and most tangible goods, and you can claim up to $2,030,000 in expenses. You can also claim the entire amount of qualifying expenses even if you take out a loan.
To explain, imagine you buy a vehicle to use exclusively for your business, and you take out a loan for $50,000 to pay for it. Even though you haven’t paid the whole amount yet, you can deduct the entire amount on your tax return. Just be careful and remember that in the upcoming years you will have to make those loan repayments, and you won’t get to claim a deduction for them. However, you will still get to claim a deduction for the interest you pay.
Make an Interest Payment
Speaking of interest, if you have any business loans, consider making an extra payment on them before the end of the year. You can include any interest you pay as business expenses on your 2017 tax return.
Similarly, if you are a homeowner who itemizes your deductions, you may also want to make an extra mortgage payment. As of 2017, you can include mortgage interest payments with your itemized deductions. Remember, your January 1st mortgage bill includes interest for December. Therefore, if you make your January mortgage payment before the end of the year, that interest is deductible.
Don’t Pay Yourself
If your business is incorporated and you pay yourself a salary, you may want to hold back your final payment for the year. That can help to lower your tax liability.
Note, however, that this may cause your business to face higher taxes. To counteract that effect, pay business bills early as explained above, or give a generous holiday bonus to your employees.
No one wants to lose money purposely, but if you suffer a capital loss, you can claim that amount against capital gains. If you have more capital losses than capital gains, you can take up to $3,000 in losses against your income.
Have a stock that has fallen in value? Worried that it may never recover? Then, you may want to sell by the end of the year so you can leverage that loss to reduce your tax liability.
Contribute to an HSA
If you have a health insurance plan with a high deductible, consider putting money into a Health Savings Account (HSA). All HSA contributions are tax-deductible, and the funds roll into next year. Best of all, as long as you use the money for eligible health expenses, you don’t have to pay tax on it next year either.
As of 2017, you can contribute up to $3,400 for an individual or $6,750 for a family. If you’re planning to spend money on your health next year and you have the funds, this can save anywhere from a few hundred dollars to $2,673. The number is based on making a maximum contribution for a family facing the highest income tax bracket.
Submit State Taxes Early
Taxpayers who itemize deductions also get to claim a deduction for state and local taxes. If you have unpaid state tax bills from previous years or if you want to get a jump start on next year, submit your payment to the state before the end of the year. Then, you can include those amounts on your 2017 tax return.
If you’re pregnant and due around the end of the year, try to have that baby before January 1st. Even if you deliver the baby on 12/31, you get to claim the child tax credit for the entire year. While this is apparently not meant to be medical advice, and babies tend to come at their own speed, you can at least hope to go into labor before the end of the calendar year.
In addition to these tips, start gathering receipts and records. The more prepared you are for April, the easier it will be to file your tax return, and the more savings you will accrue.