13 ways to pay lower taxes next year
Taxes are kind of necessary to keep our civilization humming, with schools, police, courts, roads, and so on. Still, most of us would like to pay as little in taxes as we have to. Fortunately, there are lots of ways to pay lower taxes next year -- and in years beyond. Following are 13 of them. Some may not be of interest to you or even possible, but some could save you a lot of money.
- Earn less. One way to pay lower taxes next year is to earn less. That's not going to be a popular strategy for most of us, but if you do find yourself earning less, enjoy the silver lining of lower taxes.
- Take the Earned Income Tax Credit (EITC). If you do earn relatively little, you will not only pay lower taxes based on your income, but you may also be able to take advantage of the EITC, a very powerful but underused tax credit potentially worth thousands of dollars to those who qualify.
- Have kids. Don't base your family planning on taxes, but if you're planning to have children, or more children, you'll enjoy some tax breaks. For example, the Child Tax Credit offers $1,000 for every eligible child you have under the age of 17 (as of the end of the tax year), while the Child and Dependent Care Credit is worth up to $3,000 for a single child or $6,000 for two or more children, and is tied to expenses you incur for the care of children or dependents that lets you work or seek work.
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- Buy a house. If you're deliberating between renting or buying a home, remember that mortgage interest is deductible -- as are property taxes. And in the early years of a mortgage, much of your monthly payments is made up of interest.
- Contribute to an IRA and/or 401(k). Traditional (not Roth) IRAs and 401(k)s receive pre-tax contributions, meaning that if you contribute $5,000, you get to subtract that from your taxable income and thereby pay lower taxes. (You'll ultimately be taxed on that money when you make withdrawals in retirement.) If you're in the 25% tax bracket and contribute $10,000 to these accounts, you'll cut your tax bill by $2,500!
- Contribute to an HSA or FSA. Contributions to Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are made with pre-tax money, too, so that's another way to pay lower taxes next year. Note that you need to have a qualifying high-deductible health insurance plan to be able to take advantage of HSAs. They can be well worth it, though, as they let savings accumulate and grow over time, with withdrawals for qualifying medical expenses tax-free. After age 65, you can withdraw money from an HSA for any purpose, paying ordinary income tax rates on withdrawals. FSA money, on the other hand, is mainly use-it-or-lose-it from year to year.
- Donate to charity. If it's worth it for you to itemize deductions, then being extra generous with charitable contributions can get you bigger deductions. Just follow the rules and have documentation of donations.
- Make most of hefty medical expenses. Just as with charitable contributions, medical expenses can often be deducted, so if you have the bad luck to have spent a lot on healthcare, you may be able to enjoy a little benefit by deducting many of those expenses.
- Bundle deductions. If you have trouble accumulating sufficient deductions to make itemizing worthwhile, consider bundling. That's when you try to concentrate deductions in every other year, so that you're able to itemize in one year and take the standard deduction in the next. For example, you might make annual charitable contributions in January and December of one year, and might pay deductible taxes that are due in January in December instead.
- Harvest capital losses. Many people forget that their sunken stocks have a little upside: Losses can be used to offset gains. If you're sitting on $10,000 of long-term capital gains, facing a 15% tax hit on them that will cost you $1,500, you could wipe out half of that if you have $5,000 in losses.
- Keep stocks for long term. Remember, too, that while most people face a 15% long-term capital gains tax rate, short-term gains are taxed at ordinary income tax rates, which are often 25% or 28% and can approach 40% for very high earners. Don't base stock-selling decisions solely on tax concerns, but if you're thinking of selling a winning stock, see if you might hold it for at least a year and a day, to qualify for the lower tax rate.
- Grab tax credits for energy-efficient improvements to your home. There are some tax credits available for qualifying improvements to your home that you paid for in 2016. These include insulation, energy-efficient central air conditioning, geothermal heat pumps, small residential wind turbines, and solar energy systems.
- Hire a tax pro. Finally, one of the best ways to pay lower taxes next year is to hire a good tax professional. Don't just hire anyone or go to a random tax-preparer, though. Ask around for recommendations. Consider hiring an "Enrolled Agent," a tax pro licensed by the IRS who is authorized to represent you before the IRS if need be. You might find one through the National Association of Enrolled Agents website. Or find a certified public accountant through your state's CPA society or state board of accountancy.
When it comes to paying taxes, you have more power than you think you do to lower your tax bill. See how many of these ways to pay lower taxes next year and beyond will work for you. You may be able to shave thousands off your next tax bill.
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