If you're busy filling out your tax return and grumbling to yourself about how much you're paying, know that you can pay a lot less in taxes next year if you make some smart tax moves now. And you might even be able to save on your taxes this year -- if you act fast.
The deadline for filing your taxes is looming, but there's still time to try and shrink your bill. Below are five ways to save on taxes in 2017 that can also help cut your tax bill in future years.
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Re-think your filing status
Some people are filing their returns using one filing status when they actually qualify for another filing status that could save them money. For example, if you're a single parent or support a dependent, the "single" filing status is probably not the right one for you. The "head of household" status will give you more favorable tax rates and a significantly higher standard deduction. (For the 2016 tax year, for example, the standard deduction for singles and married folks filing separately is $6,300, but it's $9,300 for heads of households.) Meanwhile, if you're married, run the numbers to see whether you're better off filing jointly or separately.
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Contribute to retirement accounts
Even though we're in 2017, it's not too late to make a 2016 contribution to a Roth or traditional IRA if you haven't done so yet. You have until the regular April tax deadline to do so -- just be sure to specify whether the contribution is for 2016 or 2017. For both traditional and Roth IRAs in 2016 and 2017, contribution limits are $5,500 for most people and $6,500 for those 50 and older. (Limits are occasionally increased, to keep up with inflation.) Contributing to a Roth IRA actually won't shrink your tax bill this year, but when you follow the rules for a Roth IRA, you may withdraw money from it in retirement tax-free. Contribute to a traditional IRA, though, and your contributions reduce your taxable income. Have $75,000 in earnings and contribute $5,000? Presto -- your taxable income shrinks by that amount. (You'll be taxed on your IRA withdrawals in retirement, though.) IRAs can be powerful retirement savings tools. Here's how much you might amass over time if you can sock away $5,000 each year:
|
Growing at 8% for... |
$5,000 Invested Annually |
|---|---|
|
15 years |
$146,621 |
|
20 years |
$247,115 |
|
25 years |
$394,772 |
|
30 years |
$611,729 |
Calculations by author.
Take all the deductions you can
Each year, check whether you'll be better off itemizing deductions or taking a standard deduction. There are gobs of deductions available, many of which are not well known. For example, some expenses that can be deducted include moving expenses (if you move for a job), job-hunting expenses, student-loan interest paid, charitable donations, medical expenses, and even gambling losses. Of course, rules and limits apply to each of these, but it can be worth exploring whether your expenses qualify.
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Look into credits you can take
Tax credits are way better than tax deductions, because they shrink your taxable income on a dollar-for-dollar basis. A $1,000 tax credit, for example, can lop a full $1,000 off your tax bill. Credits are available for all kinds of things, such as education expenses, energy-efficient home improvements, the adoption of children, the care of children and dependents, and much more. A particularly valuable credit, if your income is low enough to qualify, is the Earned Income Tax Credit, which might shrink your income by more than $6,000. The Child and Dependent Care Credit offers a credit of up to $3,000 for the care of one eligible dependent and up to $6,000, total, for two or more.
File your return and pay your taxes on time
Yes, you can apply for an extension to file your return, but you don't get an extension for paying your taxes. When filing IRS Form 4868 for an extension, you'll have to make a good-faith estimate of your taxes due and pay that amount (or any amount due when you take into account taxes withheld by your employer).
The IRS charges penalties for filing a late return and for paying taxes late. File Form 4868 on time and include any taxes owed with it to avoid headaches and penalties. Penalties can be as much as 25% of the tax owed and the unpaid tax. Even if you can't pay, file your return. And if you can pay at least some of what you owe, do so, to minimize the penalty.
The total median income tax paid by American taxpayers was recently roughly $10,000, and you may have paid more than that last year. The more you know, the less in taxes you're likely to pay.
