With the stress of tax day over for another year for most of us (unless you got an extension), now is a good time to look at how you can make the process less painful for you.
Here are 10 tips on lowering your tax bill.
1. Give yourself a raise
If you got a big tax refund this year, it meant that you’re having too much tax taken out of your paycheck every payday. Filing a new W-4 form with your employer will ensure that you get more of your money when you earn it, instead of waiting for the refund.
2. Boost your retirement savings
One of the best ways to lower your tax bill is to reduce your taxable income. You can contribute to up to $18,000 to your 401(k) or similar retirement savings plan in 2017 ($24,000 if you are 50 or older by the end of the year). Money contributed to the plan is not included in your taxable income.
3. Switch to a Roth 401(k)
If you want to diversify your investments, look at shifting some or all of your retirement plan contributions to a Roth 401(k). Unlike the regular 401(k), you don’t get a tax break when your money goes into a Roth.
On the other hand, money coming out of a Roth 401(k) in retirement will be tax-free, while cash coming out of a regular 401(k) will be taxed in your top bracket.
4. Fund an IRA
If you don’t have a retirement plan at work, or you want to increase your savings, you can use an individual retirement account (IRA). You can contribute up to $5,500 ($6,500 if you are 50 or older by the end of the year). Depending on your income and whether you are in a retirement savings plan at work, you may be able to deduct some or all of your IRA contribution.
5. Go for a health tax break
Flex plans let you put part of your salary in an account which you can use to pay medical bills. You avoid both income and Social Security taxes, and that can save you 20% to 35% or more compared with spending after-tax money. The maximum you can contribute to a health care flex plan is $2,600.
6. Pay childcare bills with pre-tax dollars
After taxes, it can easily take $7,500 or more of salary to pay $5,000 worth of child care expenses. But, if you use a child-care reimbursement account at work, you get to use pre-tax dollars. That can save you one-third or more of the cost, since you avoid both income and Social Security taxes.
7. Get your job to pay for self-improvements
Companies can offer employees up to $5,250 of educational assistance tax-free each year. The company writes the check for you improving your skills, and it doesn’t come out of your pocket. The courses don’t even have to be job-related (although many companies say they should be), and even graduate-level courses qualify.
8. Count up job hunting costs
If you’re unemployed, keep track of what it costs you to look for a new job. This includes interview travel, resume polishing services and joining professional job boards.
As long as you’re looking for a new position in the same line of work, you can deduct job-hunting costs. Such costs are miscellaneous expenses, deductible to the extent all such costs exceed 2% of your adjusted gross income.
9. Keep track of moving costs
If you find a job and you move for it, you can deduct the costs. If the new job is at least 50 miles farther from your old home than your old job was, you can deduct the cost of the move, even if you don’t itemize expenses. You can deduct the cost of moving yourself and your belongings. If you drive your own car, you can deduct 17 cents per mile for a 2017 move.
10. Be environmentally friendly
A tax credit is available for homeowners who install alternative energy equipment.
Between 2017 and 2019, it equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, and wind turbines, including labor costs.
As the law is currently written, the credit drops to 26 percent in 2020, 22 percent in 2021 and 10 percent starting in 2022.