6 Things You Can Do Now to Save on Your 2017 Taxes

/ Freidel & Associates, LLC/

The best tax planning is the kind that you do during the year. Most tax breaks can only be used by taking the right steps during the year – there is comparatively little tax planning you can do once the year closes. However, there are a number of tax saving actions that you can take after the year closes. Keep in mind that if you already filed your 2017 tax return, you may still be able to capture these savings by taking action now, and filing an amended income tax return (which is generally a straightforward process).

1)      Contribute to a Traditional IRA

If you are not covered by a retirement plan at work, you could be eligible regardless of your income to contribute to a Traditional IRA by April 17, 2018, and take the full deduction on your 2017 tax return. The annual contribution limit is $5,500 if you are under age 50, and $6,500 if you are age 50 or over. Your spouse may be able to make contributions to an IRA even if they don’t work, based on the “spousal IRA” rules.

If you are covered by a retirement plan at work, your ability to take this deduction depends on your filing status and income. If you are single, you may be eligible to take at least a partial deduction with Modified Adjusted Gross Income less than $72,000. If you are married, the income limit is $119,000.

The advantage of a Traditional IRA is the immediate tax deduction that it gives you, as well as deferring the income tax due on the account until you withdraw the funds. Keep in mind that you generally can’t access the funds without penalty until you are age 59 1/2. A Traditional IRA may make sense for you particularly if you are in a higher tax bracket, you expect your tax rate in retirement to be lower (due to lower income or lower tax rates), and you won’t be needing the money before retirement. Keep in mind the impact of tax reform on your 2018 and future tax rates – the traditional IRA is more attractive for 2017 if you expect your tax rates to go down under tax reform.

2)      Contribute to a Roth IRA

Strictly speaking, contributing to a Roth IRA account doesn’t give you a tax deduction, so it won’t directly reduce your 2017 tax obligations. However, for many individuals, a Roth IRA is a much better option than a Traditional IRA, and you have until April 17, 2018 to contribute for the 2017 tax year. The appeal of the Roth IRA is not the up-front benefit, but the future perks. All money you take from the plan after retirement age (59 1/2) is generally free from all income tax.

Please note, your ability to contribute to a Roth IRA could be limited if your Modified Adjusted Gross Income (MAGI) exceeds certain limits based on your filing status. For example, you would not be eligible to make any Roth IRA contribution if your 2017 MAGI as a single person was $133,000 or more. If you were married, the limit is $196,000. The contribution limits for 2017 for a Roth IRA are the same as with a Traditional IRA - $5,500 if you are under age 50, and $6,500 if you are age 50 or greater.

Some common scenarios that make a Roth IRA very attractive include:

  • You are early in your earning years and expect your taxable income to grow substantially in the rest of your career, and expect your taxable income and tax rate in retirement to be higher than it is now.
  • You have a lower than average year for your income – maybe you didn’t get the large bonuses that you usually earn during the year, or perhaps your business had an off year. You expect your income to bounce back in the future, and you expect your taxable income and tax rate in retirement to be higher than it is now.
  • You don’t want to take the required minimum distributions that are mandatory with a traditional IRA starting at age 70 1/2. A Roth IRA does not require any distributions until after the owner passes away.
  • You expect to have an estate subject to estate tax. If you expect to have a taxable estate, it is best to pay your taxes during your life and let post-tax money in the Roth IRA pass to your descendants.
  • You want to contribute to a retirement plan, but there is a chance you’ll need to take the money back out before retirement age. In this case, the Roth IRA allows you to withdraw the principal that you contributed (but not earnings) free of any penalty or income tax – a very nice benefit! However, don’t contribute to the Roth IRA if you know that you’ll need the money later, making a contribution and then planning to take it out  would rarely make sense. This flexibility is more of a backstop in case something comes up in the future.

3)      Contribute to an Simplified Employee Pension (SEP) IRA

If you are self-employed, particularly without any employees, you may have a terrific opportunity to contribute to your retirement account far in excess of normal limits. While a Traditional IRA has a general $5,500 contribution limit, an SEP IRA has a contribution limit that maxes out at $54,000 in 2017. This type of account is deductible against your income, similar to a Traditional IRA, and is also generally limited to 20% of your self-employment earnings. The due date for the contribution for 2017 is generally April 17, 2018, or the extended due date of the tax return for the business – if an extension is filed.

If you have employees, please note that generally  you need to contribute to all employees based on the same percentage. For example, if you contribute 20% of your self-employment earnings into your personal SEP IRA, you will also need to contribute 20% of your employee’s wages to your employee’s SEP IRA accounts – unless you meet certain narrow criteria.

In certain cases, partnerships, S corporations, and C corporations may also be eligible to set up this type of retirement plan. As with the self-employment SEP IRA, this type of plan tends to make the most sense if you don’t have employees.

4)      Contribute to a Health Savings Account (HSA)

If you are covered by an eligible high deductible health insurance plan, you may be allowed to contribute to an HSA account. The due date for this contribution for 2017 is April 17, 2018. Depending on your filing status and the health insurance plan coverage, you could be eligible to contribute anywhere from $3,400 (single coverage, under 55), to $7,750 (family coverage, 55 or older). An HSA account can be a valuable savings tool, since you are given a deduction for contributions, and withdrawals are not subject to tax as long as they are used for eligible medical expenses.

5)      Consider Tax Elections

Many tax elections are due with your tax return, and can allow you to change your 2017 taxable income. Most available elections are for businesses, so you may be out of luck if you are individual without business activities. One common tax election is a “Section 179” election to expense up to $500,000 of certain eligible business assets that were purchased during the prior tax year.

If your income will be down in 2017, and you expect it to bounce back in the future, consider tax elections to increase your income for 2017 to maximize your lower tax brackets in 2017. For example, you could elect out of bonus depreciation for 2017 to reduce depreciation deductions and maximize future benefits.

6)      Evaluate Business Accounting Methods

If you have interests in a business, carefully evaluate possible accounting method changes with your tax advisor. If the change in accounting qualifies under the “automatic” change rules, the application for this change is typically due with your income tax return.

Common accounting method changes include inventory (LIFO, FIFO, etc., and changes within each method), fixed asset (repairs vs. improvements, partial dispositions, etc.), and accrued liabilities. If the accounting method change creates income, you can generally spread this over four years, while any deductions are generally taken into account fully in the year of change. Keep in mind that the accounting methods for businesses changed significantly in 2018 with tax reform, so you need to understand what your 2017 and 2018 projected income will be, and what available options you have to manage this income in both years.

Hopefully you are able to take advantage of at least one of these tax savings ideas for 2017. Regardless, make a commitment to do comprehensive tax planning with your tax advisor for 2018 before the end of the year – you’ll have a lot more tools to work with!

This article is intended to serve as general guidance, and should not be construed as specific tax advice for your situation. Please consult your tax advisor for any specifics on these ideas – there are many nuances and issues that have not been fully elaborated in this article.