By law, we’re all required to pay taxes, but how many of us spend time tax planning to improve our tax outcome? Believe it or not, a lot of the tax code is about legal and acceptable ways to reduce or eliminate taxes. As we approach the end of this year’s tax season, it’s not a bad idea to begin thinking about how to increase our refund or reduce our liability next tax season.
Whether you’ve filed your 2017 return or not, the information in this article can get you on the right track to begin tax planning.
1. Organize Your Records
Obtaining relevant tax documents can stressful and time-consuming. As stressful as this may be, staying on top of your records is critical. While this may sound like common sense, there are potentially hundreds of tax benefits you could be missing. Though staying organized does not guarantee a reduction in taxes, there are many benefits. For starters, it can help jog your memory about potential tax deductions. Also, if you come across an IRS audit, you can back up what you filed with documentation. Staying organized makes your tax preparer’s life a whole lot easier.
2. Max Out Your Retirement Account
Contributing more money into your 401K or Roth IRA is probably one of the easiest ways to reduce your tax liability. The current annual contribution limit for IRAs is $5,500 if you’re under 50, and $6,500 if you’re 50 or older. The annual limit for 401(k)s is $18,500 if you’re under 50, and $24,500 if you’re 50 or over. Not only is this a great tax strategy, but you can also benefit from the substantial growth of your retirement account due to compound interest.
3. Give Back To Charity
I don’t have to lecture you on the importance of giving back, but if you’re still not intrinsically motivated, at least consider the tax benefits. Donating money or goods to a qualified organization can help reduce your tax bill. When it comes to goods, the amount you can deduct is the amount of what the item would sell for today. Hold on to your receipts and refer to point number 1.
4. Track Your Itemized Tax Deductions
With the IRS is increasing the standard deduction amounts to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly and surviving spouses, fewer people will choose to itemize their deductions. It’s still worth tracking potential deductions during the year, especially if you’re self-employed, own a home, or live in a high tax location. Some common deductions include tax preparations fees, professional dues, mileage, and miscellaneous business expenses.
5. Pay One Extra Mortage Payment
Homeowners can get an extra tax benefit by making an additional mortgage payment in January. Most people are aware of the interest you can deduct on your mortgage. What some people are not aware of is that the January payment covers interest that accrued during December. Keep in mind that this only applies to January and paying any further in advance would make it ineligible for this year’s tax deduction. Therefore, it’s a good idea have enough money saved to make this additional payment in January.