Expert Insights for Smart Financial Planning
5 Money-Saving Tips for Tax Season (Plus 2 Bonus Tips)
With Tax Day looming, Americans should take care not to overlook possible deductions that could minimize their tax bills.
As people finalize their returns for this year’s April 17 deadline, they should look out for these five areas:
Many people might overlook the college tuition deduction because Congress last August did not extend the $4,000 deduction that was also subsequently omitted from December’s tax code overhaul. Then on Feb. 9, as part of a massive budget deal, Congress extended the deduction for the 2017 tax year.
The above-the-line deduction for tuition and related expenses directly reduces adjusted gross income (AGI) on Form 1040 by up to $4,000 for an individual with AGI below $65,000 (or $130,000 for joint filers). The deduction is lowered to $2,000 for individuals with an AGI between $65,000 and $80,000 (or between $130,000 and $160,000 for joint filers). Because the extender was only passed in February, any filer who would have qualified but had already filed their return in January or early February will have to file an amended return.
This benefit is worth up to $1,000 for those in the 25% tax bracket and may also lower state income taxes.
Home Office Deduction
Self-employed Americans can take a home office deduction of up to $1,500 using a simplified method embedded in their Schedule C.
In addition, even some regular employees can take the deduction on their Schedule A, if they meet certain conditions. You must work at home “for the convenience of your employer,” as the IRS puts it — meaning that it’s necessary for the employer’s business to function or to allow the employees to properly perform their duties. For example, if the employer doesn’t have an office for the worker.
These days, more than four out of every 10 Americans work remotely, according to Gallup, and many of them may not be aware that they can take this deduction.
Student Loan Interest
Up to $2,500 of interest paid on student loans can be used to reduce your AGI. The deduction, worth $625 to someone in the 25% tax bracket, is fully available for those with AGI below $65,000 (or $130,000 for joint filers). The benefit phases out above that income level and cannot be claimed by those earning $80,000 or more ($160,000 for joint filers).
Health Insurance Premiums
Self-employed people can write off health/dental insurance premiums for themselves, their spouse and dependents so long as they declare a profit on their Schedule C. Like the education deductions above, this deduction reduces AGI.
Given rising insurance premiums — in 2017, insurance prices on exchanges and in the private market increased 25% — this can add up to a significant tax benefit.
Most Americans are familiar with taking deductions for donations to charitable causes. However, they can also deduct any unreimbursed costs incurred during volunteer activity and can deduct mileage for travel on behalf of a non-profit at a rate of 14 cents per mile. Similarly, mileage incurred for medical purposes can be deducted at 17 cents per mile.
Most tax professionals encourage individuals to use tax season to plan for the year ahead. That’s especially true now as the recent tax overhaul will significantly change the tax code in 2018. With many itemized deductions being removed, some Americans might consider bunching two years of charitable contributions into one year to maximize the tax advantage.
For example, someone considering a $10,000 charitable deduction in both 2018 and 2019 might opt to pay all that money in one year or the other. And, with many deductions being eliminated, it is especially important to maximize pre-tax contributions to retirement savings plans, if you can afford it, to reduce your adjustable gross income.
Bonus Tips to Keep in Mind
Should You Do Your Taxes Yourself?
Many people ask if they should pay a professional to prepare their return or undertake the work themselves. That answer varies depending on a person’s financial situation and the return’s complexity, but using a competent professional tends to pay for itself. Even for people who want to prepare their own return, it makes sense to have a professional check your work for peace of mind.
Filing Dates to Remember
This year’s federal and state deadline of April 17 gives us two extra days to prepare returns. Tax Day is normally April 15 — a Sunday this year. The April 17 deadline applies this year because of special rules related to Emancipation Day, a holiday in Washington, D.C., observed on the weekday closest to April 16.
Those not ready to file their returns can file for an extension up to April 17. To avoid fees and interest charges, extension filings must include payment for the 2017 balance due. Approved extensions have six months to file, by Oct. 15.
Finally, anyone who has overlooked a deduction that they could have taken in previous years can file amendments generally for the three years immediately prior to the current tax year. So, this year, filers can still amend returns for 2014, 2015 and 2016, if needed.
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