There's a reason we're generally advised to focus on our taxes year-round. The more vigilant we are, the more money we stand to keep for ourselves, and away from the IRS. But even though we're almost a month into 2018, it's technically not too late to make one last move that can lower your 2017 taxes significantly: funding an IRA.
In fact, you actually have until April 17, 2018 (this year's tax deadline) to pump some cash into your IRA. And the closer you get to maxing out your allowable contribution for the year, the more money you'll shave off last year's tax bill.
Tax savings made easy
While not everyone has access to a 401(k) plan through work, the beauty of the IRA is that anyone with an income can open or contribute to one. Now there are two main types of IRA: traditional and Roth. If you're looking to snag a break on your 2017 taxes, then you'll want to stick with the former, because Roth IRA contributions are not tax-deductible (though there are plenty of other good reasons to open a Roth).
The maximum amount of money you can contribute to your 2017 IRA is $5,500 if you're under 50 and $6,500 if you're 50 or older. These limits, incidentally, remain unchanged for the current tax year. What this means is that if you're 45 and max out, and your effective tax rate is 25%, you'll shave $1,375 off your tax bill, just like that. Furthermore, as is the case with all tax deductions, your actual savings will increase proportionally with your effective tax rate, so that if you're 45 and max out but have an effective tax rate of 30%, your savings will equal $1,650.
That said, the IRA deduction is unique in that you're not required to itemize on your tax return in order to claim it. Most other deductions don't work this way.
10 ridiculous tax loopholes
10 ridiculous tax loopholes
1. Alaskan Whaling Captain Deduction
Alaskan whaling captains can avoid tax on up to $10,000 of whaling-related expenses per year. Costs they can deduct include purchasing and maintaining the boat, weapons and gear, food and supplies for the crew, and storing and distributing the catch.
When a business pays for capital improvements — like building a new office or buying a new machine — it typically deducts those costs over the life of the asset, which could translate into decades. A special exception exists in the tax code for “certain motorsports entertainment complex property placed into service before Jan. 1, 2017,” which refers to NASCAR tracks and other racing facilities. The exception allows businesses to deduct the costs over seven years, which is much faster than usual.
(Onfokus via Getty Images)
3. Hawaii’s Exceptional Tree Deduction
If you take care of an “exceptional tree” in Hawaii, you can deduct up to $3,000 on your state taxes of what it costs you. A local county arborist advisory committee must declare it an exceptional tree and you’ll need an affidavit from the arborist stating the tree’s type and location and what you paid to maintain it. You can take this deduction only once every three years.
(agaliza via Getty Images)
4. Florida’s Rent-a-Cow Deduction
If you live in Florida and want to pay lower property taxes — perhaps on your second home that has a lot of open land — consider renting some cows. Under greenbelt laws, if you use your land for agricultural purposes, your real estate taxes are based on the agricultural value of the land, not its market value.
This deduction doesn’t explicitly state how many cows you have to raise or even that you have to own them. Developers often let a few dozen rented cows roam their land — sometimes even during construction — to lower their property tax bills.
5. New Mexico’s Centenarian Deduction
If you live to be 100 years old, moving to New Mexico will cut your tax bill because you will pay no tax to the state. A caveat: You cannot take the deduction if you claim someone as a dependent. Paying no state income tax might not be a huge break, but if it’s available, take it.
(gece33 via Getty Images)
6. Qualified Performing Artist Deduction
If you’re searching for a tax loophole you can use — one that doesn’t benefit only the 1 percent — the IRS allows qualified performing artists to deduct certain expenses. To qualify, you must have performed for at least two different employers during the year and received at least $200 from each, had business expenses that exceeded 10 percent of your performing arts income and claimed less than $16,000 in adjusted gross income for the year. If you’re married, that $16,000 limit applies to both your spouse’s and your incomes.
(DragonImages via Getty Images)
7. Home Landscaping Deduction
If you regularly see clients at your home office, you might be able to write off a portion of your landscaping costs. The IRS allows a deduction for the portion of your home costs that are related to your home office, so as long as you use your home office exclusively for business, you might be able to take this one. If keeping your lawn looking good for your clients is part of the job, you’re in luck.
(Elenathewise via Getty Images)
8. Personal Pool Deduction
Install a pool for medical treatments and you could be in for a big tax break. One taxpayer suffering from emphysema and bronchitis was prescribed swimming by his doctor as part of his treatment, so he built a pool and wrote off a portion of the costs as a medical expense. He could deduct only the amount by which the installation cost exceeded the home’s increase in value, but he did get to include upkeep costs.
Deducting body oil on your taxes might sound downright crazy, but you might be able to. One professional bodybuilder needed to shine a little brighter during competition so he applied body oil. When tax season rolled around, he included the cost as a business expense. At first, the IRS disallowed the deduction, but the Tax Court approved because using the oil made him more competitive.
(bekisha via Getty Images)
10. Charity Meat Deduction
Meat packers, butchers and processing plants in South Carolina can earn a $75 state tax credit for each deer carcass they process and donate. You must be licensed with the state or the U.S. Department of Agriculture and you must have a contract with a qualified nonprofit that distributes food to the needy. If you use any of the deer for commercial purposes, you will not qualify for the donation.
At this point, the idea of funding an IRA and snagging a pretty sweet tax break probably sounds good. But what if you're already covered by a 401(k) or other retirement plan through your employer? If that's the case, then you might still manage to claim a deduction for putting money into an IRA -- it just depends on how much you earn. Here's what the 2017 income limits look like when you're covered by an employer-sponsored retirement plan:
Tax Filing Status
Income Limits for IRA Deduction (AGI)
Single or head of household
Married filing jointly
Married filing separately
DATA SOURCE: IRS.
What this means is that if you're single, your AGI last year was $73,000, and you were covered by a retirement plan through your employer, you can't deduct IRA contributions on your return. But if you're single, your AGI last year was $65,000, and you were covered by a retirement plan through work, you can take a partial deduction for the money you put into your IRA. Furthermore, if you're married and don't have a retirement plan through work, but your spouse does, you can't take an IRA deduction if your AGI is over $10,000 if filing separately or over $196,000 if filing jointly.
Funding last year's IRA is a great way to reap some tax savings, but you'll need to get moving. Though you have until this year's filing deadline to fund your 2017 IRA, which is Tuesday, April 17, 2018, it often takes a day or two for funds to clear your account, so don't expect to walk in on April 17 and get your IRA in order. Rather, fund that account in advance -- today, even. And if you need the extra couple of months to save, mark your calendar now so that you don't forget to make that contribution in time. The IRA deduction is one of the most lucrative tax breaks you can get, so be sure to take full advantage of it while you still can.
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Finding a good CPA for your taxes is simple with these seven tips: 1. Ask about their specialization; 2. Verify their identification number, 3. Look up their license, 4. Consider their experience, 5. Confirm their willingness to sign, 6. Ask for advice, and 7. Determine their fees.
Congress has passed the largest piece of tax reform legislation in more than three decades. The bill went into place on January 1, 2018, which means that it will affect the taxes of most taxpayers for the 2018 tax year.