Reduce Your AGI Income & Taxable Income Savings
With tax season weeks away, it never hurts to plan for your taxes. Make the most of year-end savings options and try reducing your taxable income.
Let’s explore the tax breaks available to procrastinating planners:
Contribute to a Health Savings Account
If you participate in an eligible health plan, you may have the option to contribute to a health savings account or HSA up to the following amounts:
- $3,400 if your health plan covers only yourself
- $6,750 if you have family coverage
Those over age 55 can contribute up to an additional $1,000 as well to their HSA. This contribution can be made up until the due date of your return, so you can decide to make a contribution for 2017 as late as April 17, 2018.
If you have not reached the applicable contribution limit for the year, it might be a good idea to contribute.
Contributions are deductible even if you do not itemize your deductions. In addition, HSA funds can remain in the account and do not expire at the end of the year. Therefore, placing money into the HSA may enable you to cover potential out-of-pocket medical expenses in the future using tax-free funds.
Bundle Medical Expenses
Medical expenses are deductible in certain instances. This deduction only applies when both of the following are true:
- You decide to itemize your deductions (instead of taking the standard deduction);
- Total medical expenses paid exceed 10% of your AGI. The 7.5% threshold was eliminated for 2017 and after.
For many, these restrictions will prevent any medical expenses paid out-of-pocket during the year from being deducted on their return.
If you do qualify for this deduction, it’s ideal to bunch medical payments into a single year.
The deduction applies when the expense was paid. If your medical provider allows it, you can arrange to pay medical expense from prior or future years in the current year. Thus, allowing you to increase your total medical expenses for the year.
Sell Assets to Capitalize on the Capital Loss Deduction
Do you know about the capital loss deduction? If you had capital gains during the year (such as gain from a sale of stock or investment property), then you can offset those gains with capital losses.
You can also claim a net capital loss deduction of up to $3,000 against the rest of your income and get a lower AGI. If you have net losses greater than $3,000, the excess will be carried forward to the following year. Unused capital losses can be carried forward indefinitely.
Make Charitable Contributions
Charitable contributions can both decrease your tax liability and allow you to give back to your favorite cause. Contributions can be made in the form of cash or property to any qualified charitable organization. Special rules and restrictions may apply for non-cash contributions.
As with medical expenses, this deduction is only available for those who itemize. There is generally no restriction on the amount you may give to a qualified charity. However, if your income exceeds certain levels, the amount you can deduct may be phased out or eliminated. Contributions are deductible in the year they are made. So, by giving more to a qualified charitable organization before the end of the year, you could increase your tax deduction.
Make Education Savings Plan Contributions for State-Level Deductions
Contributing to an education plan like qualified tuition programs (QTPs, or 529 plans) and Coverdell Education Savings Accounts (ESAs) will not qualify you for a deduction on your federal return. However, many states will allow a deduction on your tax return for these contributions.
It’s important to note that in many cases, there are no limits placed on how many such accounts can exist per individual.
Prepay Your Mortgage Interest and/or Property Taxes
Another pair of commonly itemized deductions, especially for homeowners, relates to mortgage interest and real estate property tax payments.
Often, it’s possible to arrange your billing for these expenses so that interest and tax payments for the following year can be paid before the end of the current year.
For example, you may be able to pay mortgage interest for January 2017 prior to the end of December 2016, which would allow you to deduct the mortgage interest paid on your 2016 return.
- Posted In:
Leave a Reply