Tax reform may be looming on the horizon, but it's not likely to take effect until the 2018 tax year at the soonest. That means you can still use the best of the tried-and-true tax breaks to minimize your federal income taxes for the current year. Here are some of the most effective ways to cut your tax bill for 2017.
Max out your IRA contributions
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If you're eligible for the IRA deduction, then by all means make use of it by contributing as much as possible to your IRA. The IRA contribution limit for 2017 is $5,500, plus an additional $1,000 catch-up contribution for taxpayers age 50 and up. That means you could get as much as a $6,500 deduction just for saving for your retirement.
Most taxpayers can take the full IRA deduction for any contributions they make, but if you have access to a 401(k) or other workplace retirement plan, your IRA deduction may be limited. Single or head of household taxpayers with an annual income of $72,000 or more, and married filing jointly taxpayers with annual income of $119,000 or more, can't take the IRA deduction in these circumstances.
Group itemized deductions
If the Tax Act passes with its current limitations on itemized deductions, then 2017 may be your last chance to take advantage of the medical expense deduction, the state income tax deduction, the employee expense deduction, and many more. So if you've been putting off medical or dental work, schedule those appointments before the end of December – come 2018, you may not be able to deduct such expenses at all.
Grouping as many itemized deductions as possible in a single year allows you to get the biggest possible tax break. And don't limit yourself to just the medical expense deduction: for example, cleaning out your closets and your attic and donating your finds to charity can give you a very helpful charitable contribution deduction. Other common itemized deductions include property taxes, mortgage interest, state and local taxes, investment expense, and even tax preparation fees.
Tax loss harvesting
Selling your investments for a profit will expose you to capital gains taxes, unless those investments are inside a tax-sheltered account such as a 401(k) or IRA. However, there's a clever way to protect yourself from capital gains taxes: any gains you make during the year can be offset by capital losses, potentially wiping out your entire capital gains tax bill.
For example, let's say that you sell some shares of stock and end up with $1,000 in capital gains. Normally you'd have to pay a capital gains tax; assuming that these were long-term capital gains and you're in the 15% tax rate, then the tax would come to $150. However, let's say that you have another investment that you're not happy with and that's declined in value by $500 since you bought it. If you sell that investment during 2017, you can subtract the $500 loss from your $1,000 in gains and will only owe taxes on the remaining $500, slashing your capital gains tax bill in half.
Note that you shouldn't run mad among your investments and sell something just to reduce your taxes – it's important to only buy and sell investments when it makes sense for your overall investment strategy. However, if you can time your transactions in a way that also reduces your tax bill, then you can at least get some kind of benefit out of selling your losses.
Contribute to an HSA
HSAs can be an even better tax deal than IRAs or 401(k)s. That's because with an HSA, you get a triple tax advantage: a deduction for your contributions, no taxes on the investments within the account, and no taxes on your distributions so long as you use the money for qualified medical expenses.
In order to get an HSA, you need an HSA-enabled health insurance policy. Fortunately, HSA-enabled policies are always high deductible policies, which means that they tend to have relatively low monthly premiums. That's yet another financial advantage that these accounts can provide. However, like other tax-advantaged accounts, HSAs do have annual contribution limits. For 2017, you can contribute a maximum of $3,400 if you have a self-only health insurance policy, or $6,750 if you have a family policy.
Get professional help
There are quite a few tax deductions and credits available to taxpayers for 2017, and it's a good idea to browse through them and see which ones you might be able to claim. If that sounds like way too much work, consider hiring a tax professional to prepare your return for you. She'll be able to quickly match you up to every possible tax break, so you'll likely make more in tax savings then you'll spend on her fee -- not to mention the peace of mind of knowing you've got an expert on your side.
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