If there's one thing pretty much all working Americans can agree on, it's that it's better to lose less money to taxes than more. As we head into 2018, here's a list of moves you can make to lower your tax burden and pocket more of your hard-earned money.
1. Contribute to an IRA or 401(k)
One of the easiest ways to slash your 2018 tax bill is to pump money into a traditional IRA or 401(k). The money you contribute to either account goes in tax-free, and your associated savings are a function of your effective tax rate. That means if you contribute $5,000 to either account, and your effective tax rate is 30%, you'll save yourself $1,500 in taxes just like that.
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The annual contribution limit for IRAs in 2018 is the same as for 2017 -- $5,500 if you're under 50, and $6,500 if you're 50 or older. The annual limit for 401(k)s, however, is increasing slightly next year, which means that if you're under 50, you can contribute up to $18,500, and if you're 50 or over, you can sock away up to $24,500.
2. Make an extra mortgage payment
Homeowners are privy to a number of tax benefits, the most lucrative of which is typically the mortgage interest deduction. Now you could just make your standard 12 monthly mortgage payments in 2018 and call it a day, but if you want to eke out some extra tax savings, consider making at least one additional payment next year. The IRS allows you to deduct any mortgage interest you pay in a given year, regardless of whether it falls under your typical payment schedule, so if you make that extra payment, you'll not only shorten the life of your home loan, but shave a little extra off your tax bill.
3. Give more cash to charity
Being charitable may be good for the soul, but it's also good for your taxes. That's because any time you donate money to a qualified organization, you can deduct that amount on your return. All you need to do is retain a receipt for the cash you give away to reap this benefit.
4. Clean out your closets
It's not just cash donations you get snag a tax deduction for. Any time you give goods away to a registered charity, you can deduct that donation on your tax return as well. Just keep in mind that you're only allowed to claim a deduction for the fair market value of those items, which is what they'd go for in their present state. If you bought a coat three years ago for $200 and it's since seen its share of wear, you can't list its current value as $200 for tax purposes.
5. Track your mileage
If you're self-employed and use your vehicle for work purposes, it pays to keep a detailed record of your travels. That's because you're allowed to deduct mileage any time you use your vehicle to drive to an office, attend a meeting, or run business-related errands. All you need to do is maintain an official mileage log so you know what to claim on your return.
6. Sign up for an FSA
If your employer offers a flexible spending account (FSA), it pays to sign up. That's because you'll get to pay for healthcare and child care expenses with pre-tax dollars, thus lowering your tax burden overall. In 2018, you can contribute up to $2,650 to a healthcare FSA, and up to $5,000 to a dependent care FSA (assuming you're either single or married filing jointly; otherwise, married couples filing separately can contribute up to $2,500).
Now there is a catch: You'll need to rack up eligible expenses that total the amount you contribute to your FSA; otherwise, you'll risk forfeiting that money. But if you do a good job of estimating your expenses, you can avoid losing out.
7. Hold profitable investments for at least a year and a day
If you're sitting on a winning investment, it often pays to cash it out and use that money for other purposes. The only problem is that whenever you sell an investment for more than what you initially paid for it, you end up on the hook for capital gains taxes. That said, if you make sure to hold your investments for at least a year and a day before selling them, you'll land in the more favorable long-term capital gains category.
Currently, long-term capital gains max out at 20%, and most tax filers pay just 15%. Short-term gains, meaning those applied to investments held for a year or less, are taxed the same as ordinary income, and under the current brackets, you'll lose more of your proceeds to the IRS if you end up having to pay them.
8. Sell bum investments at a loss
Nobody likes losing money on investments, but if you are looking at a couple of underperformers in your portfolio, it pays to unload them next year and take the loss. The reason? Investment losses can be used to offset capital gains, so if you're looking to sell another security at a profit, and you take a loss for that exact same amount, the two will cancel each other out. Furthermore, if your net investment losses next year exceed your net gains, you can apply up to $3,000 of the remainder to offset your ordinary income, and then carry the rest of your loss forward into 2019.
Here's an example. Imagine that next year, you earn $2,000 in gains and take a $6,000 loss. The first $2,000 of that loss will be used to cancel out your gains. The next $3,000 will be used to offset your ordinary income for the year, and the remaining $1,000 will be carried into the following tax year. In other words, not such a bad deal.
9. Invest in municipal over corporate bonds
The benefit of investing in bonds is that they offer relative stability coupled with steady income in the form of interest payments. The problem, however, is that when you buy corporate bonds and collect that interest, you end up losing a portion to taxes. To avoid that fate next year, focus your bond investments on those issued by municipalities (like cities, states, and counties), as opposed to corporations. Municipal bond interest is always tax-free at the federal level, and if you buy bonds issued by your home state, you'll avoid state and local taxes as well.
10. Set up a home office
If you're self-employed, here's a good reason to work from your home instead of your local coffee shop next year: As long as you dedicate a space in your home for business purposes only, you can claim a home office deduction on your taxes. Furthermore, that space will need to be your primary place of business.
In other words, you can't set up shop at your kitchen table and claim that it's really your office for tax purposes, nor can you section off a corner of your living room but spend the bulk of your time working from a space you rent outside the home. But if you meet the criteria, a home office deduction could work wonders for your tax bill.
Of all the financial goals you might set for 2018, lowering your taxes should definitely be one of them. Follow these tips, and with any luck, the IRS will get less of your money next year.
