Tax Reform Tips: 5 Best Moves to Save Money Now
Due to pending tax reform, making smart tax moves may be even more important this year. Laura reviews five ways to save money based on the current tax law and what’s proposed for the future.
Laura Adams, MBA
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Tax Reform Tips: 5 Best Moves to Save Money Now
The end of the year is always a busy time with holiday preparations and celebrations. New Year’s Eve is also the end of the tax year, which is a critical deadline for your personal finances and last-minute opportunities to save money.
But this year making smart tax moves may be even more important due to pending tax reform. The Senate and the House each passed their own tax bills, and the administration’s next step is to reconcile them into a single bill that President Trump can sign by the end of 2017.
If legislation passes, there will be changes for the 2018 tax year and beyond. While we don’t know exactly what the final reforms will be, use these five ways to save money based on the current tax law and what’s proposed for the future.
Tax Reform Tips: The Best Moves to Save Money Now
- Defer income to next year.
- Prepay deductible expenses.
- Make a charitable donation.
- Max out a workplace retirement account.
- Manage your flexible spending arrangement (FSA).
Here’s more detail about each of these money-saving strategies.
1. Defer income to next year.
There may be fewer tax brackets and lower rates for many Americans next year due to tax reform. So, if you have income that you can control, consider waiting until 2018 to receive it so you owe less in taxes compared to this year.
For instance, if you have self-employment income from a small business or freelance work, you could delay billing customers or clients. If you’re an employee who earns commissions or a year-end or quarter-end bonus, find out if they can be paid next year.
2. Prepay deductible expenses.
Prepay as many deductible expenses as possible so you can take advantage of them before they disappear or become much more difficult to claim in the future.
Tax reform may eliminate or reduce many existing tax deductions. Some require you to itemize deductions on your tax return and others don’t.
So, another smart year-end tax strategy is to bunch up as many deductions as you can this year. Prepay as many deductible expenses as possible so you can take advantage of them before they disappear or become much more difficult to claim in the future.
Here are some deductible expenses to consider paying before the end of the year:
Medical expenses: These are deductible up to certain limits now, but could be eliminated or reduced. So, take care of as many of your family’s medical, dental, vision, and hearing needs as possible before the end of the year. Set appointments and pay for prescriptions or other deductible expenses as soon as you can.
State and local income taxes: These are deductible now, but could also be eliminated or reduced. If you’re a homeowner, why not make your property tax payment for 2018 ahead of time? You’ll make sure to get another tax deduction and perhaps an early-pay discount, too. If your state charges income tax, you could also pay it this year instead of waiting for the deadline in 2018.
Home mortgage interest: This is deductible now, but could become difficult to qualify for due to tax reform. Consider paying your January mortgage payment by December 31 so you have an extra chunk of interest to deduct for this year.
Student loan interest: This is currently deductible up to certain limits, even if you don’t itemize deductions. However, this tax benefit may be eliminated, so prepay your January student loan payment by December 31 and get a little more tax savings for the current year.
3. Make a charitable donation.
When you make a donation to a qualified charity, you may also be eligible for a tax deduction, if you itemize. That’s a winning combination in my book!
Tax reform may allow charitable deductions, but make itemizing more difficult or less worthwhile in the future. So, if you want to make a charitable donation, this may be the best year to do it.
4. Max out a workplace retirement account.
If you have a retirement plan at work, such as 401(k), 403(b), 457, or government Thrift Savings Plan, review how much you contributed for the year. For 2017, you can contribute up to $18,000, or $24,000 if you’re age 50 or older.
Every pre-tax dollar that you contribute to a traditional retirement plan is income that you don’t pay tax on until you make a withdrawal. By deferring taxes, you keep more money in the account that can grow over time.
Every pre-tax dollar that you contribute to a traditional retirement plan is income that you don’t pay tax on until you make a withdrawal.
Additionally, many employers match a percentage of your contributions to company-sponsored retirement plans. Taking advantage of that benefit is a terrific deal because you receive free money to build a larger nest egg and cut your taxes at the same time.
To get this sweet tax benefit you don’t even need to itemize deductions on your tax return. But you do need to make your final contributions before December 31. So, if you can bump up your final contribution(s) to reach the annual limit, I highly recommend it—especially if you’re expecting a year-end or quarter-end bonus at work.
If you can’t afford to max out a workplace retirement plan this year, try to contribute enough to max out any employer matching funds. Now is also the perfect time to increase your contributions for next year. The annual limits in 2018 go up by $500 to $18,500, or $24,500 if you’re over age 50.
Make a goal to increase your retirement contribution rate by at least one percent each year until you hit the maximum limit. And if you aren’t participating in a retirement plan at work yet, don’t make the mistake of thinking that you’re too young to plan for retirement, or that you’ll make up the difference when you earn more later.
Young people have a lot to gain by saving early because you can amass a fortune on far less than someone who starts later in life. In other words, postponing retirement contributions is expensive. Even contributing a small amount, such as $250 per month for a modest return over several decades, could give you close to $1 million to spend in retirement.
You can log on to your online retirement account to make contribution changes or ask your benefits administrator or an account custodian for help.
5. Manage your flexible spending arrangement (FSA).
Another type of account with benefits linked to the calendar year is a flexible spending arrangement or FSA. These spending plans are offered by many employers to help you save for certain expenses, such as child care and medical bills, on a pre-tax basis through payroll deductions.
For example, if your average tax rate is 25%, you instantly save 25% on your medical expenses when you can pay for them using funds in your FSA because that money is never taxed.
However, there is a deadline to spend your money in an FSA each year or you forfeit the excess. This is known as the “use it or lose it” rule. The cutoff varies by company, but it’s typically December 31.
If your employer adopts a grace period permitted by the IRS, you may have additional time to spend funds in the account for a short time after the New Year. If not, be sure you drain the fund before the end of the year. You might opt for preventive care, such as a dental or vision checkups, new prescription glasses, or to purchase extra sunscreen, first aid kits, or cold medicine, so you don’t lose one penny in the account.
Take advantage of every employee benefit you can this year. If you have tax questions or want to do more year-end tax planning, it’s always a good idea to meet with a tax professional who can review your situation and make sure you never pay more tax than your fair share.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.