5 Smart Tax Moves You Can Make Right Now

The average income tax paid by American taxpayers was recently $10,489. There's a good chance your bill tops that each year. If you want to keep more of your money in your pocket and not Uncle Sam's, you need to make some smart tax moves -- both now, in tax season, and also throughout the year.

So here are five ways to minimize the taxes you pay as well as tax-related headaches you may suffer.

Image source: Getty Images.

1. Be organized and prepared

First off, don't just think about taxes in March or April. One thing you should do year-round is maintain a folder or box for tax-related documents. In it, keep any receipts that you may need for itemizing your deductions -- such as ones for donations you made, child care or medical expenses you incurred, and so on. After the end of the year, add any 1099 Forms and other documents you receive from your banks and brokerages and employers. You won't want to have to hunt for receipts and tax-related documents at the last minute, when you're rushing to prepare your tax return.

2. Contribute to retirement accounts

Even though we're in 2018, it's not too late to make a 2017 IRA contribution. There are two main kinds of IRA: the Roth IRA and the traditional IRA. With a traditional IRA, you contribute pre-tax money that reduces your taxable income and, therefore, your tax bill for the year. If your income is $75,000 and you contribute a total of $10,000 to a traditional IRA and a 401(k), your taxable income drops to $65,000, letting you postpone being taxed on $10,000. When you withdraw the money in retirement, it's taxed as ordinary income to you for that year. With the Roth IRA, you contribute post-tax money that doesn't deliver any upfront tax break. But you eventually get a big tax break when you withdraw from the account in retirement – because if you follow the rules, you get to take all the money out of the account tax-free. It's pretty much the same with 401(k) and their newer counterpart, the Roth 401(k).

You have until the regular April tax deadline to make IRA contributions -- just be sure to specify whether a contribution is for 2017 or 2018. For both traditional and Roth IRAs in 2017 and 2018, contribution limits are $5,500 for most people and $6,500 for those 50 and older. The table below shows how much money you can accumulate with annual $5,500 contributions at different average annual rates of growth:

Data source: Calculations by author.

A 401(k) plan, meanwhile, can be even more powerful and often features free money from your employer, in the form of matching funds. The contribution limit for 401(k) accounts is generous: For 2017, you can contribute up to $18,000 to your 401(k), plus an additional $6,000 if you're 50 or older -- for a possible total of $24,000! For the 2018 tax year, it's $18,500 plus the same $6,000 if you're 50 or older. The table below shows how powerful it can be to make sizable contributions for many years. Note that many employers offer Roth 401(k) accounts now, too.

Data source: Calculations by author.

Finally, you may not think of a Health Savings Account (HSA) as a retirement account, but it can sort of be one. If you have a qualifying high-deductible health insurance plan, you can fund an HSA with pre-tax money, lowering your tax bill. That money can be used tax-free for qualifying healthcare expenses and it can accumulate over years, too, invested and growing. Once you turn 65, you can withdraw money from an HSA for any purpose, paying ordinary income tax rates on withdrawals -- and making the account serve as an additional retirement savings account. HSA contribution limits for 2017 are $3,400 for individuals and $6,750 for families. Those 55 or older can chip in an additional $1,000. For 2018, the limits are $3,450 and $6,900 for individuals and families, respectively, with the additional $1,000 still available.

Image source: Getty Images.

3. Make the most of tax deductions and tax credits

Most of us need to check every year to see whether we have enough deductions to make itemizing worthwhile or whether we're better off taking a standard deduction. (Note that beginning in 2018, many deductions will no longer be available, and the standard deduction will be bigger.)

Most people know that charitable contributions and medical expenses can be deductible, if they exceed a certain amount. But did you know that you may be able to claim a deduction for student loan interest you pay or moving expenses you incur when moving for a new job or money you spend as a teacher supplying your classroom? Even gambling losses, tax-prep fees, and union dues can be deductible for the 2017 tax year. (Note, though, that some deductions, such as those for casualty and theft losses and tax-prep fees, are being eliminated in 2018. On the other hand, whereas currently you can only deduct the portion of qualifying medical expenses that exceeds 10% of your adjusted gross income, that floor falls to 7.5% beginning in 2018.)

There are many available tax credits, too, and they're much more powerful than tax deductions. Have taxable income of $75,000 and $5,000 in deductions? Your taxable income is now $70,000. If you're in the 25% tax bracket, you avoid being taxed on that $5,000 and save $1,250. But if you have taxable income of $75,000 and a $5,000 tax credit, the credit reduces your tax dollar-for-dollar. It's worth a full $5,000.

Tax 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 could shrink your income by more than $6,000. The Child and Dependent Care Credit and the Lifetime Learning Credit are two more credits available in both 2017 and 2018.

Image source: Getty Images.

4. Shrink or eliminate your capital gains taxes

Be tax-smart when it comes to your investments, too. When you sell stocks and other assets, you face capital gains taxes. Short-term gains, from assets held a year or less, are taxed at your ordinary income tax rate. Long-term gains, from assets held for more than a year, are taxed at 15% for most people and more for high earners. If you're in the 10% or 15% tax bracket, though, your long-term capital gains tax rate is 0%.

Keep those factors in mind, because once you're retired, your income might fall significantly, and you might find yourself in a lower tax bracket. By waiting to sell some appreciated assets until you're in a lower bracket, you may be able to pay a lower tax rate -- or no tax at all -- on your gains. Just be sure that waiting is a reasonable thing to do. If you plan to sell out of a stock because you've lost faith in it, for example, it's probably best to just sell and not wait to do so.

Meanwhile, if you know you'll be facing taxes on capital gains you realized throughout the year, perhaps due to stocks sold at a profit, you may be able to reduce or wipe out those taxes by offsetting the gains. For example, if you have $9,000 in gains and you sell enough holdings to generate a loss of $5,000, you can pay taxes on only $4,000 in gains. If you have way more losses than gains, you can wipe out your gains entirely, then shrink your taxable income with up to $3,000 of your losses, and then carry over any leftover losses into the next year. (If you plan to buy back any of the losers you sold, be sure to wait at least 31 days, lest you end up with a "wash sale" that doesn't count.)

5. Hire a tax pro

Finally, know that if you don't want to prepare your own tax return or are very nervous about doing so, it's perfectly reasonable to hire a tax pro. After all, a good tax pro will know far more about the tax code than you do and may be able to lower your tax bill while suggesting effective strategies for you. Don't just hire anyone, though. Ask around for recommendations and consider hiring an "Enrolled Agent," a tax pro licensed by the IRS who is authorized to represent you before the IRS if need be. You might find one through the National Association of Enrolled Agents website.

Don't ignore your taxes throughout the year and then rush through preparing your return in April. If you spend some time learning a little more about taxes or employing a good pro, and you make smart tax moves throughout the year, you may be able to shave hundreds or thousands of dollars off your tax bill.