You haven't even filed your 2016 tax return yet, so it may seem a bit early to think about your 2017 taxes. However, smart tax planning is a year-round activity -- not just something you do when you prepare your return. In that spirit, here are five things you could do in 2017 that could reduce your taxes and boost your refund.
1. Get a change of scenery
If you've been toying with the idea of moving to a different area of the country, it may interest you to know that moving expenses are tax deductible if the move is related to the start of a new job.
You don't even need to have a new job lined up before you move. For your expenses to qualify, the move needs to pass two tests:
- Time test: You must work full-time for 39 out of the 52 weeks immediately following the move. In other words, as long as you find full-time employment within three months or so of moving, you can still get the tax break.
- Distance test: According to the IRS' wording, "Your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. If you had no previous workplace, your new job location must be at least 50 miles from your old home." While this is a bit technical, the point is that your move needs to be sufficiently far away from your old job location to justify the tax break.
If these two tests are satisfied, you can deduct expenses such as driving mileage, packing supplies, shipping costs, hired movers, storage expenses, and lodging expenses on the way to your new home.
The best part of all is that the moving expenses deduction is an "above-the-line" deduction, which means that you can take it whether or not you itemize deductions on your tax return.
2. Take a class
It's well-known that college students may qualify for a tax credit for paying tuition, known as the American Opportunity Credit. However, this is only good for the first four years of college, and only if a degree or certificate is being pursued.
On the other hand, the lesser-known Lifetime Learning Credit doesn't have these restrictions. The credit is worth 20% of up to $10,000 worth of educational expenses, and there is no degree program, credit hour, or other requirement. You can take a single class for personal enrichment or to obtain career skills and qualify for this credit. If you take a class that costs $1,000, this credit can give you $200 of that amount back.
The biggest restriction on the Lifetime Learning Credit is income-related. For the 2017 tax year, the credit phases out for incomes above $55,000 (singles) and $110,000(married filing jointly), and disappears completely above incomes of $65,000 and $130,000, respectively.
3. Buy a house
If you have been on the fence about buying a house, the tax benefits could be the motivation you need to finally get into a home of your own.
There are several lucrative tax breaks available for homeowners, including:
1. Mortgage interest: You can deduct the interest on up to $1 million worth of mortgages on a first or second home. This is the big one -- if you have a $300,000 mortgage at 4% interest, this deduction can be well over $10,000 per year for the first few years of your mortgage.
2. Mortgage insurance: If you have to pay mortgage insurance, which typically happens if you put less than 20% down on your home, this may be tax-deductible as well, subject to income limitations.
3. Points: If you paid discount points to get a better interest rate, these are deductible as well.
4. Property taxes: The property taxes you pay on your primary residence are deductible. In high-tax states, like New Jersey for example, this can be an especially nice tax break.
5. Capital gains exclusion: When you eventually sell your home, you can make up to $250,000 ($500,000 for couples) in profit before you have to pay income taxes on your gains.
Here's a more detailed discussion of how buying a home can save you money on your taxes.
4. Be generous when charities need it most
According to WalletHub, 20% of all charitable donations occur during the last 48 hours of the year. And it would be fair to assume that many more donations happen in the weeks before the end of the year when everyone is in the "giving spirit."
The point is that charitable organizations need money all year round, not just at the end of the year. For 2017, consider giving to charity steadily throughout the year. For example, if you donate to your local animal shelter like I do, consider handing them a donation check in, say, May. Of course, they'll appreciate your donations whenever they come, but it could be an especially welcome gift if it comes at a time of limited cash flow.
Also, wouldn't it be easier on your wallet to donate periodically throughout the year, as opposed to trying to cram your donations in at the last minute?
Here's a thorough discussion on the rules and documentation requirements for charitable donations to make sure you get to deduct every dollar you donate.
5. The best tax break of all
Of all the available tax breaks, I tend to look at retirement-related tax breaks as the best of all. As I've written before, not only can saving for retirement boost your tax refund, but it can also help set you up for financial freedom later in life.
If you contribute to a tax-deferred type of retirement account, such as a traditional IRA or through a 401(k), 403(b), or 457 plan, your contributions may be tax deductible. Think of it this way -- if you contribute $5,000 to a traditional IRA and you're in the 25% tax bracket, we're talking about $1,250 in tax savings.
On top of this deduction, low- to moderate-income taxpayers may qualify for the Saver's Credit, which is literally free money just for contributing to a retirement account. This tax credit can be worth up to $1,000 for singles or $2,000 for couples, so it's worth looking into.
The best part is that you'll be doing your future self a favor. Let's say that you contribute the $5,500 maximum to a traditional IRA every year for 30 years. You'll end up contributing a total of $165,000, and will most likely save tens of thousands of dollars on your taxes along the way. Based on the stock market's historical returns, your account could swell to more than $800,000 in those three decades -- quite a nest egg.
By saving for retirement, you can get a nice tax break now and a retirement nest egg for later. That's why I say it's the best tax break of all.