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With Tax Day here, plenty of Americans who owe money to the government are feeling the pain of paying up.
Other taxpayers are happy to receive a refund this year but are perhaps also wishing it was bigger.
Whatever you owe to or receive from Uncle Sam this year, you can make next year better by looking forward and starting to chip away at your next tax bill.
It’s easier to lower your tax bill by planning ahead than by scrambling around at the last minute. So take the following tips as a starting point.
1. Consider itemizing deductions
For tax year 2017, the IRS has set the standard deduction amounts at:
- $9,350 for heads of household, up $50 from 2016
- $6,350 for singles and married persons filing separate returns, up $50
- $12,700 for married couples filing jointly, up $100
In other words, you can generally reduce your 2017 adjusted gross income (AGI) — the amount of income you are taxed on — by one of those amounts.
But as we recently explained in “Tax Hacks 2017: Don’t Miss These 16 Often-Overlooked Tax Breaks,” if you have a lot of deductions, itemizing them may lower your AGI by even more than the standard deduction:
“If your itemized deductions are greater than the standard deduction, leave no stone unturned hunting down legitimate items. You’ll likely lower your tax bill, the IRS says.”
If you’re unsure whether you have enough deductible expenses to make itemizing worthwhile, check out “Could These 12 Weird Tax Deductions Save You Money?”
If itemizing looks like it makes sense for you, start saving receipts for deductible expenses now. It’s easier to collect them and keep them in one place throughout the year than to hunt down a year’s worth of receipts when you sit down to do your taxes next year.
2. Invest in your retirement
Contributing pretax dollars to certain types of retirement accounts can also help reduce the amount of taxes you owe. These account types include:
- 401(k) plan
- 403(b) plan
- Most 457 plans
- Thrift Savings Plan
- Traditional individual retirement account (IRA)
For tax year 2017, the contribution limits for these account types remain the same as they were for 2016.
The downside to contributing pretax dollars to retirement accounts is that you will be taxed on contributions when you withdraw money from these accounts in retirement.
If you prefer to contribute post-tax dollars to a retirement account — which will enable you to withdraw money from them tax-free in retirement — invest your money in a Roth 401(k) or Roth IRA. Just understand it won’t help lower your next bill.
3. Look for credits
What’s even better than a tax deduction? A tax credit.
A tax deduction lowers your AGI — your taxable income — while a tax credit lowers your tax bill. We explain this further in “Pop Quiz: Is It Better to Have a Tax Credit or a Tax Deduction?”
So now is the time to identify any credits for which you could qualify and do whatever is necessary to ensure you can claim them on your 2017 tax bill next year. Start with the half-dozen tax credits detailed in “Tax Hacks 2017: Don’t Miss These 16 Often-Overlooked Tax Breaks.”
What’s your favorite way to reduce your tax bill? Share it below or on our Facebook page.