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Tax



https://www.schwab.com/resource-center/insights/content/taming-taxes-strategies-minimizing-your-bill

1. Maximize your 401(k): You can shield up to $18,000 ($24,000 if you’re over age 50) in annual income through an employer-sponsored 401(k) plan.

2. Fund an Individual Retirement Account (IRA): You may also be able to deduct up to $5,500 ($6,500 if you’re over age 50: ) through contributions to a traditional IRA.1

3. Enroll in a Health Savings Account (HSA): Individuals who have high-deductible health plans2 can shield up to $3,400 in annual income through an HSA ($4,400 if you’re age 55 or older), and families can generally shield up to $6,750 ($7,750 if the account holder is age 55 or older). Contributions are generally tax-deductible;3 capital gains, dividends and interest accumulate tax-free; and you pay no tax on withdrawals for qualified medical expenses.

4. Minimize RMDs: Of course, maxing out traditional IRAs or 401(k)s today could mean a larger portfolio—and tax bill—tomorrow. That’s because required minimum distributions (RMDs) kick in at age 70½. The bigger your portfolio, the bigger your RMDs—potentially pushing you into a higher tax bracket. For example, if you had $3 million in a traditional IRA, you’d need to withdraw roughly $110,000.4 Add other sources of income—Social Security, say, or earnings from a rental property—and you could easily land in the 28% bracket or higher in 2017.The good news is there are several ways to try to minimize both your bracket and your tax bill in retirement, Rob says. One strategy, if you have a large traditional IRA or 401(k) balance, is to withdraw money from retirement accounts before you reach age 70½ (though not so much that it would land you in a higher bracket). “Once you reach age 59½, you can take distributions from a traditional IRA without penalty,” Rob says. “If you start taking small withdrawals at that age, you can reduce the size of your portfolio and thus the size of your RMDs when you reach 70½.”

5. Open a Roth IRA: Another strategy is to contribute to a Roth IRA, to which RMD rules don’t apply because it’s funded with after-tax dollars. What’s more, withdrawals of earnings made after age 59½ are tax-free, provided you’ve held the account at least five years. “If you think your tax bracket might be the same or higher in retirement than it is today, or want flexibility to manage the size of distributions and the taxes paid when you reach retirement, a Roth is worth considering,” Rob says. Under current law, only those individuals who earn less than $118,000 ($186,000 if you’re married) can contribute the full amount to a Roth IRA for the 2017 tax year. However, even investors who exceed those limits can avail themselves of a Roth IRA conversion. (See “Consider a conversion,” below.) Rather than settle for any single strategy, investors might consider all of the above. For people who have saved a healthy sum for retirement, it can be helpful to diversify retirement savings—dividing their money among traditional IRAs, Roth IRAs and taxable accounts holding long-term investments.

6. Put your assets in the right place: You should also try to hold your least tax-efficient investments in your most tax-advantaged accounts. The income thrown off by real estate investment trusts (REITs), for example, makes them well suited to an IRA, where any income won’t be taxed until retirement. Conversely, tax-efficient mutual funds, exchange-traded funds and stocks make more sense in a taxable investment account—provided you hold on to them for a year or more. That’s because any realized gains are subject only to long-term capital gains rates, which are generally lower than ordinary income taxes.

7. Pay attention to tax efficiency: Just as you might compare expense ratios of similar mutual funds, you can also assess the relative tax efficiency of mutual funds you plan to hold in a taxable account. You can determine how often fund managers trade—and if they produce taxable short-term gains—or whether the securities in the fund produce income in the form of dividends and/or interest.

8. Don’t go it alone: Get financial planner, tax attorney or public accountant


Tax Deductions

Sales tax, income tax
You have the option of deducting sales taxes or state income taxes off your federal income tax. In a state that doesn’t have its own income tax, this can be a big money saver. Even if you paid state taxes, the sales tax break might be a better deal if you made a big purchase like an engagement ring or a car. You have to itemize to take the deduction, but the IRS provides tables to use as a guide.


2. Health insurance premiums: Medical expenses can blow any budget, and the IRS is sympathetic to the cost of insurance premiums—at least in some cases. Deductible medical expenses have to exceed 7.5 percent of your adjusted gross income to be claimed as an itemized deduction for tax years 2017 and 2018. However, if you’re self-employed and responsible for your own health insurance coverage, you might be able to deduct 100 percent of your premium cost. That gets taken off your adjusted gross income rather than as an itemized deduction.

3. Tax savings for teacher: It’s the rare teacher who doesn’t have to reach into her own pocket every now and then to purchase items needed for the classroom. While it may sometimes seem like nobody appreciates that largesse, the IRS does. It allows qualified K-12 educators to deduct up to $250 for materials. That gets subtracted from your income, so you can take advantage of it even if you don’t itemize.

4. Charitable gifts: Most taxpayers know they can deduct money or goods given to charitable organizations—but are you making the most of this benefit? Out-of-pocket expenses for charitable work also qualify. For example, if you make cupcakes for a charity fundraiser, you can deduct the cost of the ingredients you used to bake them. It helps to save the receipts or itemize the costs in case of an audit.

5. Paying the babysitter: You might be able to deduct the cost of a babysitter if you’re paying her to watch the kids while you volunteer to work for no pay for a recognized charity. The federal Tax Court has ruled that it’s OK to list the cost of a babysitter as a charitable contribution on your return, if you can document that while she was performing her duties, you were volunteering.

6. Lifetime learning: The tax code offers a number of deductions geared toward college students, but that doesn’t mean those who have already graduated don’t get a tax break as well. The Lifetime Learning credit can provide up to $2,000 per year, taking off 20 percent of the first $10,000 you spend for education after high school in an effort to increase your education. This phases out at higher income levels, but doesn’t discriminate based on age.

7. Unusual business expenses: If something is used to benefit your business and you can document the reasons for it, you generally can deduct it off your business income. A junkyard owner, for example, might be able to deduct the cost of cat food that encourages stray cats to hang around and keep the mice and rats away. A bodybuilder got approved to deduct the body oil he used in competition.

8. Looking for work: Losing your job is traumatic, and the cost of finding a new one can be high. But if you’re looking for a job in the same field, you itemize your deductions, and these expenses exceed 2 percent of your adjusted gross income, any qualifying expenses over that threshold can be deducted. It may seem like a high bar, but those costs add up quickly—consider deducting the mileage you put on your car driving to interviews and the cost of printing resumes.

9. Self-employed Social Security: The bad news about being self-employed: You have to pay 15.3 percent of your income for social security and medicare taxes, the portions ordinarily paid by both employee and employer. But there's one small consolation—you do get to deduct the 7.65 percent employer portion off your income taxes.







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