Ways for Everyone to Save on Taxes Under the New Tax Law
- Max Out Your Tax-Deferred Savings
One of the best ways to cut your taxes is to set money aside in a tax-deferred retirement account. Not only are you doing the wise thing by saving for a winning retirement – you could trim your income enough to fall into a lower tax bracket.
So if your employer offers a tax-deferred program like a 401(k), make sure that you are:
- Participating, so that you don’t miss out on any match your employer provides.
- Putting in as much money as you can.
If you have your own business, you have several choices of tax-favored retirement accounts, including Simplified Employee Pensions (SEPs) and individual 401(k)s. Contributions cut your tax bill now while earnings grow tax-deferred for your retirement.
Since the contribution limits for these programs are high ($55,000 per year if you’re under 50, $61,000 if you’re 50 or over), they can be a substantial shelter for big earnings, if you’ve got them.
2. Tap into IRA
Individual Retirement Accounts are a straightforward, easily accessible way to cut your taxes the same way the 401(k) does. But they do have strict rules.
If neither you nor your spouse participate in a workplace retirement plan, then you can contribute $6,000 ($7,000 if you’re 50 or older) to an IRA and wham, take that off your taxable income – even if you don’t itemize deductions.
If you or your spouse do have a plan at work, your deduction might be limited. It depends on your income. This IRS document has more details.
3. Health Savings Account
See if your workplace offers an insurance plan that you could combine with a Health Savings Account, or consider opening one yourself if you buy your own coverage. A health savings account lets you put money pre-tax for a wide range of medical bills, including deductibles, co-pays and other medical expenses that aren’t covered by insurance, such as vision and dental care.
An HSA offers a triple tax break: The money you put in escapes all tax—no federal income tax, no state or local taxes, and no FICA taxes), the balance grows tax-deferred (and can be invested in mutual funds), and withdrawals used to pay medical expenses are tax-free.
If you really want to swing for the fences with the tax-savings potential of an HSA, go ahead and fund it with pre-tax money, but pay for your out of pocket health costs with cash in your pocket rather than drawing down HSA funds. It takes real financial discipline (and good health) to pull this off, but it will let your HSA money continue to grow tax-deferred.
4. Get Tax Credit for Your Good Works
Tote up out-of-pocket costs of doing good. Keep track of what you spend while doing charitable work, from what you spend on stamps for a fundraiser, to the cost of ingredients for casseroles you make for the homeless, to the number of miles you drive your car for charity (at 14 cents a mile). Add such costs with your cash contributions when figuring your charitable contribution deduction.
Again, you’ll need to itemize your taxes to claim these.
5. Start Up that Business
Tax reform created a powerful incentive for people to hang out their own shingle and participate in the gig economy. Under the new tax law, sole proprietors who use Schedule C, as well as pass-through entities—such as S corporations, partnerships and LLCs—which pass their income to their owners for tax purposes, get to deduct 20% of their qualifying income before figuring their tax bill.
For a sole proprietor in the 24% bracket, for example, excluding 20% of income from taxation has the same effect of lowering the tax rate to 19.2%.
There are limitations, though: For many pass-through businesses, for example, the 20% deduction phases out for taxpayers with incomes in excess of $157,500 on an individual return and $315,000 on a joint return.
6. Go Ahead, Set Up that Home Office
If you use part of your home regularly and exclusively for your business, you can qualify to deduct as home-office expenses some costs that are otherwise considered personal expenses, including part of your utility bills, insurance premiums and home maintenance bills.
Some home-business operators steer away from these breaks for fear of an audit. But the IRS now makes it easy to claim this tax break. Instead of calculating individual expenses, you can claim a standard deduction of $5 for every square foot of office space, up to 300 square feet. Of note if you were an employee who had a dedicated home office that you used as your principal place of business: Your ability to write off those expenses is gone, with the new tax law’s elimination of miscellaneous itemized deductions.
7. Be Smart with Education Tax Breaks
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of educational assistance tax-free each year. That means the boss pays the bills but the amount doesn’t show up as part of your salary on your W-2. The courses don’t have to be job-related, and even graduate-level courses qualify.
If your employer isn’t so generous (or you don’t have one) and you’re paying your own tuition for a graduate course or other training, you may qualify for a Lifetime Learning Credit that’s worth 20% of up to $10,000 of qualifying expenses. That could knock off as much as $2,000 from your tax bill. The right to claim this tax saver phases out if your income exceeds $50,000 on a single return or $100,000 on a joint return.