Want to lower your 2017 tax bill? A number of opportunities to offset prior-year income and capture credits are still available until the April 17 tax filing deadline.
First of all, take note: Taxpayers have a few extra days to get their 2017 income tax returns in this year. The filing deadline, which normally falls on April 15, is extended by two days because April 15 falls on a Sunday and because Washington, D.C. celebrates Emancipation Day on April 16.
It is also important to note that, aside from some exceptions, the new tax reform law passed in December for 2018 will not impact your current tax bill, as it is your 2017 tax return that you file this year.
Taxpayers who were looking to minimize their tax liability had a number of tools at their disposal before the New Year hit, including potentially deferring income, accelerating deductions, or selling off losing stocks to offset capital gains — a concept known as tax loss harvesting. But those opportunities abruptly ended on Dec. 31 for the 2017 tax filing season.
“There were a whole host of tax moves you could make before the end of the year,” said Paul Morrone, a certified public account and financial planner for U.S. Wealth Management in North Haven, Connecticut, in an interview. “Most have expired, but not all.”
Those that remain, he said, revolve primarily around retirement plan contributions, tax credits, and penalty avoidance.
Retirement plans: Retroactive contributions
Your traditional Individual Retirement Account, or IRA, offers the biggest potential bang for the buck.
The Internal Revenue Service allows taxpayers to make deductible prior-year contributions all the way up to the tax filing deadline.
For 2017 and 2018, total contributions to all of your traditional and Roth IRAs for taxpayers under age 50 cannot be more than either $5,500, or your total compensation for the year if you earned less than that amount. Those 50 and older can make an additional $1,000 catch-up contribution, for a total of $6,500.1
Deductible contributions could save you big. A taxpayer in the 25 percent federal and 5 percent state brackets, said Morrone, “effectively gets a 30 percent return right out of the gate by virtue of a reduction in their federal and state tax bill.” On a $5,500 contribution, that amounts to a $1,650 tax savings.
Your actual tax deduction, however, may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels.
For those covered by a workplace retirement plan, the deduction begins to phase out for single tax filers who made more than $62,000 last year and disappears completely at $72,000 and beyond — $99,000 and $119,000 respectively for married taxpayers who file jointly.2
Eligible taxpayers can also make retroactive contributions to their Roth IRA until April 17. Different phase-out limits apply for Roth contributions.
Because Roth IRAs are funded with after-tax dollars, that won’t yield a current year tax deduction, but it may potentially produce a better return since earnings upon retirement can be distributed tax-free.
Simplified Employee Pension IRA account owners who get an extension to file can potentially delay their contribution further still, until October.
Contributions to a SEP-IRA, geared for small business owners and the self-employed, cannot exceed the lesser of 25 percent of total compensation, or $54,000 for 2017.
If you operated a business last year, the “SEP may be a terrific way to receive a deduction and save for retirement with contribution limits well over those available with regular IRAs,” said Elliot Herman, a CFP™ and CPA with PRW Wealth Management in Quincy, Massachusetts, in an interview.
Tax deductions: Roll up your sleeves
Most taxpayers take the standard deduction, a fixed dollar amount set forth by the IRS that reduces the amount of income on which they are taxed.
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Why? Because it’s a lot less work. You don’t have to keep track of your expenses, or individually deduct them on IRS Schedule A. For 2017, the standard deduction for single filers is $6,350 and $12,700 for married taxpayers filing jointly. (The standard deduction roughly doubles in 2018 for all taxpayers per the new tax reform bill, jumping to $12,000 for single filers and $24,000 for married taxpayers who file jointly.)
If you own a home, have high medical expenses, or were out of work for much of the year, however, you could save more by itemizing your tax deductions instead.
Expenses that can be itemized include, but are not limited to: medical and dental expenses that exceed 7.5 percent of your adjusted gross income (AGI), state and local income taxes, real estate and personal property taxes, home mortgage interest, charitable contributions (subject to certain limitations), and unreimbursed employee expenses, including the costs associated with finding employment.
According to the IRS, you are subject to the limit on certain itemized deductions if your AGI is more than $309,900 for married joint filers, $287,650 for heads of household, $261,500 for singles, or $156,900 for married taxpayers filing separately.3 Additionally, certain deductions such as that for unreimbursed employee expenses, are only available to the extent they exceed 2 percent of your AGI.
The only thing worse than giving Uncle Sam his due, is leaving a tip.
To avoid a potentially hefty late-filing penalty, you must submit your income tax return on time, regardless of whether or not you can afford to pay.
Indeed, the failure-to-file penalty can be as much as 5 percent of your unpaid taxes for each month or part of a month that your tax return is late, up to 25 percent of your unpaid taxes.
By comparison, the penalty for failure-to-pay is far less: one-half of 1 percent of your unpaid taxes for each month or part of a month for which your balance is unpaid after the due date.
If you can’t afford to pay your taxes in full, you can reduce additional interest and penalties by paying as much as you can with your tax return, according to the IRS.
Remember, too, that simple mistakes on your tax return may result in a rejected claim or underpayment of your balance due, which opens the door to late-payment penalties.
According to the government, the most common errors include missing signatures, math errors, insufficient postage, and incorrect identification information such as name, taxpayer identification number, and current address. Others select the wrong filing status, forget to date their return, or check the wrong exemption boxes for their personal, spousal, and dependency exemptions.
Double-check before you file to minimize risk of costly penalties.
Submitting your tax return electronically ensures greater accuracy than mailing it in since the IRS e-file system flags common errors and kicks back returns for correction.
When it comes to lowering your taxable income, you are your best advocate.
Tax deductions, which reduce the amount of your income subject to tax, are great, but tax credits, which reduce your tax bill dollar for dollar, are even better. So don’t leave any tax credits or deductions for which you are eligible on the table.
Families with dependent children may be eligible to claim a credit of up to $1,000 per qualifying child under the Child Tax Credit.
If you paid for someone to care for your child, spouse, or dependent so you could work or look for a job, you may be able to claim the Child and Dependent Care Credit. The amount of the credit is a percentage of the amount of work-related expenses you paid to a caregiver, and is based on your income. Total expenses may not exceed $3,000 for one individual or $6,000 for two or more qualifying individuals, and the amount of your credit is between 20 percent and 35 percent of allowable expenses.
Low- to moderate-income taxpayers, especially families, should check to see if they can claim the valuable Earned Income Tax Credit. For the current filing year, the maximum credit for those with no children is $510, while those with one child may receive a credit of $3,400, two children $5,616, and three or more children $6,318. To qualify, you must meet certain federal requirements and file a tax return, even if you owe no taxes.
Single taxpayers with adjusted gross income of $31,000 or less in 2017 ($62,000 for married filing jointly) may also be able to claim the Retirement Savings Contributions Credit, or Saver’s Credit, which provides a credit up to $2,000 ($4,000 for married filing jointly) for amounts they voluntarily save for retirement, including amounts contributed to their IRAs, 401(k) plans, and other workplace plans.
Similarly, those paying for higher education expenses may be able to claim one of two tax credits: the American Opportunity Tax Credit, which provides up to $2,500 in tax credits on qualifying education expenses, or the Lifetime Learning Credit, which may be as high as $2,000 per eligible student. You cannot claim both credits in the same year.
If you haven’t yet filed your tax return for 2017, there’s still much you can potentially do to minimize the amount you may owe.
By taking advantage of tax-favored retirement tools, filing an accurate return, and educating yourself on available deductions and credits, you might just save enough to pay off your credit card debt or catch a flight somewhere warm.
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1 Internal Revenue Service, “Retirement Topics – IRA Contribution Limits,” Oct. 20, 2017.
2 Internal Revenue Service, “2017 IRA Deduction Limits – Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work,” July, 26, 2017.
3 Internal Revenue Service, “ Publication 17 (2017), Your Federal Income Tax,” Dec. 26, 2017.