By Kristen Coyner, MSA
Your April 18, 2016 tax bill is still the stuff of nightmares. It was a good year, but that check to the Treasury Department really dampened your outlook about it. This year is looking good too, but even with estimated tax payments, it looks like the 2017 tax return isn’t going to be much better. Is it too late to mitigate the damage?
Even though the leaves are turning and there’s a chill in the air, maybe it isn’t too late to make some changes which could greatly reduce that dreaded tax bill without dramatically increasing your estimated tax payments. Increasing deductions and reducing taxable income are still possible. Let’s look at a few ways to get ahead of the game. Note: these suggestions are generally applicable only for those who itemize on their tax return.
Many of our clients are contractors who find themselves with crazily packed workloads throughout the summer months. Now is a great time for them to top off those tax-deferred retirement accounts like IRAs. This has the double benefit of boosting your savings AND reducing your taxable income.
Even if you are covered by a retirement plan with your employer, you might be eligible to make a contribution. Check with your financial planner or accountant to be sure.
Another benefit to these contributions is that you can make the payment as late as Tax Day, 2018. Just make sure you file the return AFTER the contribution, since you’d be liable for penalties and interest if something happens and you are unable to make the contribution and you’ve already deducted it. Be aware that there are contribution limits so, again, check with your financial planner or accountant to ensure you stay under the maximum.
Along the same line, prepaying your real estate taxes for next year can usually be deducted when it is paid. So think about paying these taxes for 2018 during Tax Year 2017. If the taxes are being held in escrow, however, you won’t be able to deduct this amount until it actually released to the taxing authorities.
For our Oregon clients, this can be a great deduction at the end of the year. You can claim deductions for state and local income tax paid during the calendar year. This includes liability for the past year as well as the current year. If you know you will owe on your state return, you can pay it early to get an immediate tax savings. Make sure you don’t over pay though. If you get a refund, it will be taxable next year.
Donating to causes close to your heart is not only helpful to the recipients! Charitable donations to qualifying organizations are great tax deductions. As with most things, the deductions are limited, but they are still a reasonable way to reduce your tax owing.
Deductions are typically limited to 50% of your adjusted gross income. Don’t overestimate the fair market value of your gift, either. You can’t write off the full price you paid on that dresser when you bought it 15 years ago. Also, if it is a large noncash donation, you’ll need additional support in the form of an appraisal. Take a look at IRS Publication 526 for more details about that. https://www.irs.gov/pub/irs-pdf/p526.pdf
Additionally, while your time for volunteering isn’t deductible, mileage in your personal vehicle for volunteer work is. Make sure you document everything!
You’ve worked hard. Keep more of your money with wise tax planning!