Tax filing season officially begins Monday, January 22, the day the IRS will begin accepting electronic tax returns. And the last day to sneak your postmarked returns into the IRS is Tuesday, April 17, 2018. (Wait, why? The traditional tax-filing deadline of April 15 is pushed out to the 17th because the 15th is on a Sunday and the 16th is Emancipation Day, a public holiday for those living in Washington, D.C. So everyone gets a two-day reprieve.)
Plus, it’s never too early to think about ways to pare down that tax bill with savings strategies that will help you educate yourself and your kids, supplement your retirement, and help others.
Some things need to be done by year end in order to qualify for a tax break; for others, you need to get your ducks in a row before the tax deadline. But the time to start planning is now.
Six things to Do Before Year End
1. Remember Required Minimum Distribution (RMD) Deadlines
Do you have money in a tax-deferred account such as a Traditional, SIMPLE or SEP IRA? Are you at least 70 1/2 years of age? If so, you’re required to withdraw at least a certain amount each year and pay taxes on it. It’s called a Required Minimum Distribution (RMD), and your first one (in the tax year in which you turned 70 1/2) must be completed by the following April tax deadline.
But your second, and all subsequent RMDs must be taken by Dec. 31 of the current tax year. If you don’t take the required RMD, or not enough of the annual requirement, you could be facing a hefty 50% excise tax on the missed amount. And that requires additional tax-form filings too.
2. Funding Education
The American Opportunity Tax Credit of up to $2,500 on the cost of tuition, fees, and course materials is still available through the end of 2017, although there are income levels for what can be claimed, and you, your spouse, or a dependent must be enrolled at least part-time in a degree program. Unlike the Hope scholarship credit, this can be claimed for four years of post-secondary education instead of two.
The Lifelong Learning Credit is not as generous, but less restrictive. It’s a 20% credit on the first $10,000 of qualified education expenses for any classes you might take at an eligible educational institution in order to participate. There is no limit on the number of years you can claim it for you, your spouse, or your dependent.
3. Additional Education Incentives
If you have children or grandchildren, consider starting to save for their educations with tax-advantaged plans while they’re still toddlers. A 529 account, Coverdell education savings, or custodial account might be avenues to pursue, although not all states offer them with tax benefits. These typically have income limits too.
And remember that student loan interest up to $2,500 is deductible if your modified adjusted gross income does not exceed $80,000 if single, $160,000 if married and filing jointly.
4. Charity and Volunteer Work Donations
It’s always good to help out your fellow man and woman in times of need, and if you’ve done so at your local church or food pantry or any of the relief efforts going on throughout the world, those can be tax deductible. Remember, too, that any expenses incurred in the process, say for gas and parking, or even uniforms or vests, might be deduction items. The standard per-mile rate is $0.14.
5. Disaster Relief
Of course, there are tax relief programs for those who suffered in the aftermath of recent hurricanes. The IRS has itemized them as well as adding tax relief for severe storms, tornadoes, and flooding that may have occurred in other areas; see fact-sheets here. Be sure to ask for and keep all donation receipts.
6. Check Your Portfolio
Do you have an outsized gain in a particular investment class or sector, and losses elsewhere in your portfolio? Perhaps it’s time to check your portfolio balance, and maybe make a tweak or two in order to keep your portfolio in line with your investment objectives. When you do, consider the tax consequences. Some investors, for example, will sell out and take a loss on some investments in order to offset other gains.
Four Things to Do Before You File
1. Retirement Contributions
If you haven’t already hit your 2017 IRA contribution limit, do so before the tax deadline rolls around. Ditto for 401(k) and other employee or government savings plans.
Your total contributions to all of your traditional and Roth IRAs cannot be more than: $5,500 ($6,500 if you’re age 50 or older); double those figures if you’re filing jointly. You have until Tuesday, April 17, 2018, to make them, but waiting might leave you with a self-inflicted procrastination penalty caused by losing the potential gains that might be available between now and then. Also, if you do make a 2017 contribution next year, be sure to clarify that it is a 2017, not 2018, contribution.
For 401(k), 403(b) and certain government plans, the employee contribution limit is $18,000.
2. Catch-up Contributions
If you’re over 50 years old and still contributing to employee and government plans, you can add an extra $6,000 to them for 2017. You have until April 17 to make contributions. More details about income limitations and qualified plans can be found on the IRS site.
3. Retirement Deductions
You might be able to take a deduction on your contribution to your traditional IRA, and it could be as high as the total contribution. There are no deductions for contributions to Roth IRAs, but remember you won’t be taxed on them when you take a qualified distribution from a Roth account.
4. Self-Employed Retirement Contributions
If you have a SIMPLE IRA, you may deduct up to $12,500 if you’re under 50 years old, or $15,500 if you’re older. The deduction for contributions to a Simplified Employee Pension (SEP) account maxes at $54,000, or approximately 20% of your adjusted net earnings. And you have until your 2017 tax filing deadline including extensions to both open and fund a SEP.