5 Tips For Reducing Your Taxable Income Before Year’s End
With the end of the year fast approaching, it’s not too early to start thinking about taxes – or too late to make some moves before 2018 to lower your tax bill. Here are the top five actions you should consider taking for reducing your taxable income before 2017 comes to an end.
1 – Open an HSA
A health savings account (HSA) is a tax-exempt account that you can use to pay for or reimburse yourself for certain health care expenses. Your employer may offer an HSA. In that case, you’ll typically open the account when you enroll in health insurance through your employer. If your employer doesn’t offer an HSA, or if you’re self-employed, you can open an HSA on your own.
You can contribute to an HSA only if your health plan qualifies. Eligible plans are high deductible health plans, or HDHPs.
In addition to having a qualifying health plan, you can’t be:
- Covered by another non-HDHP
- Enrolled in Medicare
- Claimed as a dependent on someone else’s return
You can open and contribute to an HSA until the due date of your federal income tax return. But, you won’t be able to reimburse yourself for any expenses you incurred before you opened the account.
Make sure you contribute to your HSA by your federal tax return filing deadline to lower your 2017 adjusted gross income and tax liability.
2 – Increase your Retirement Plan Contributions
A 401(k) is a common tax-advantaged retirement plan that employers offer. You must make contributions by Dec. 31, 2017, to reap the benefits on your 2017 tax return.
Contributions to a 401(k) lower your adjusted gross income and your tax liability. If you received unexpected income this year that may cause you to owe additional taxes when you file your return, increasing your 401(k) contributions will allow you to hold on to some of your income that would otherwise go to the IRS.
Just remember that eventually, you’ll be taxed on your 401(k) funds when you take them out. After all, these accounts allow your contributions and earnings to grow tax-free, but 401(k)s don’t avoid taxes altogether.
3 – Contribute to Charities
If you donate cash or property, such as clothing and household goods, to charities by Dec. 31, 2017, you can deduct the contributions on your 2017 tax return. Just remember to get a receipt from the charitable organization you’re donating to. The IRS may require you to substantiate those contributions by providing receipts and appraisals, if necessary, if you get audited.
4 – Spend Your FSA Funds
Flexible spending accounts (FSAs) cover common medical or dependent care costs. With these accounts, if you don’t use all your FSA funds by the end of the year, you could lose the rest.
If you have extra money in a health FSA to spend, you might want to schedule doctor or dentist appointments before the end of the year, or buy prescription medicine, hearing aids, or contact lenses.
If you pay these expenses with your personal funds instead of your FSA debit card, make sure you submit your receipt for eligible expenses within the time required by the plan. Some plans allow you an extra 2½ months after the end of the year to use the unspent amount, so check with your plan administrator to find out your deadline.
5 – Determine the Best Timing for Business Purchases
If you own your own business or work as an independent contractor, you may want to consider your projected tax liability for this year and next before making end-of-year purchases for your business.
If you expect to be in a higher tax bracket this year than next, consider making business-related purchases before the end of the year. If you expect to be in a higher tax bracket next year, you may want to wait until the beginning of the next tax year before making those business-related purchases.
Because some purchases are fully deductible in the year of purchase, while you must depreciate others over a number of years, you may want to talk to a tax professional to find out how a particular item might impact your tax liability.
Your Block Advisors tax advisor can help you determine the best year-end tax moves for your specific situation.