Last Minute Tax Savings by John NowakSubmitted by Moller Financial Services on March 3rd, 2017
By now, almost everyone should have received the necessary forms to file their tax returns. Since late-January, it seems like every week a new 1099, W-2, or 1098 shows up in the mail reporting how much income we earned or expenses we may deduct. Is there anything else you can do keep some of the money you earned from going to Uncle Sam? Let’s explore a few ideas that may help you save on your 2016 taxes, even though it is now 2017.
Review your bank and credit card statements for charitable donations and find your goodwill donation receipts. For any monetary donation, you should have a financial record of the transaction. If any single donation is greater than $250, the charitable organization is also required to provide you with a written acknowledgment of your gift. Another place to look for a charitable donation is an annual membership to an organization such as the Museum of Science and Industry or Chicago Botanic Garden. These memberships offer great experiences and may be tax-deductible. Organizing your charitable donations for the year is a great way to save taxes and reflect on how you were able to support others.
Medical Expenses and Health Savings
Another potential deduction is to itemize your medical expenses and health savings account contributions. Unfortunately, deducting medical expenses requires a taxpayer to have either very high expenses or lower taxable income. Only medical expenses that exceed 10% of income for taxpayers younger than age 65 (or 7.5% of income if older) are deductible. That is a pretty big hurdle to overcome! If you are in a situation where you have large out-of-pocket expenses or pay for your own health/long-term care insurance, these costs may be large enough to deduct.
If you do not fall into this category and have a Health Savings Account (HSA), you still may be able to save taxes. For 2016, the deductible contribution limit to an HSA for a family is $6,750 ($7,750 if age 55 or older) and $3,350 for an individual ($4,350 if age 55 or older). You have until April 15, 2017 to make a contribution for 2016. Distributions from an HSA for qualified expenses may be made at any time.
Flex Spending Accounts (FSAs), on the other hand, can only be funded during the calendar year and have strict distribution deadlines. Many plans have a March 15 grace period to “spend” the money from the previous year and April 15 to make the reimbursement request to the plan. Generally, you can keep up to $500 in the account for the next year but forfeit anything exceeding this limit.
Child and Dependent Care Expenses
If you have a child younger than age 13 or a disabled dependent and pay for care that allows you to work, you may qualify for a 20% credit (or more) on expenses up to $3,000/$6,000 (one/more dependent(s)). Again, make sure to document your expenses and be familiar with IRS Publication 503 to claim the credit.
529 College Savings Plan Contributions
Speaking of children, many states allow you to deduct 529 college savings plan contributions. Illinois, for example, allows a married couple to deduct $20,000 in annual contributions ($10,000 per spouse) to Bright Start 529 accounts. So don’t forget to keep your December statement that shows how much you contributed. A $10,000 contribution and deduction would lower your Illinois taxes by $375. The future growth and distributions are also tax-free when used for qualified education purposes.
The limit for an IRA contribution for 2016 is $5,500 for those under 50 (ages 50+ get an extra $1,000) and can be made until April 15th. These contributions may be deductible based on your working and marital status, company retirement plan, and income. You may also qualify to make a direct Roth IRA contribution that is not deductible but becomes tax-free for retirement. If your income is too high for a direct Roth contribution, a “back-door” Roth contribution/conversion may be another way to build a tax-free retirement bucket. It is important to review your personal situation and plan to decide if and which type of contribution would be best for you.
While self-employed people pay double the payroll taxes (employee and employer portion of Medicare and Social Security), they may have the ability to deduct costs such as a home office, car, phone, internet, equipment, etc. The biggest deduction of all could be a retirement plan.
If you are looking for a last-minute tax break, a SEP IRA (Simplified Employee Pension IRA) may be an ideal retirement plan for you. Unlike other employer retirement plans, a SEP IRA can be created and funded in 2017 as long you complete it before filing your 2016 tax return. A self-employed person may contribute up to 20% of income, with a $53,000 contribution limit. While a 401(k) or SIMPLE IRA plan may allow a self-employed person to contribute and deduct a greater dollar amount for retirement, these plans must have been created in 2016 or prior – no procrastinators allowed.
You now have about six weeks left to file your return and six considerations to lower your taxes. Good luck with your 2016 return! We will also see if there are any tax changes in 2017 and help you plan accordingly.