Yes, tax season is officially over. And you might be kicking back and relaxing, putting off thinking about next year’s taxes as long as you can. However, smart taxpayers know that the more you plan ahead, the better chance you have of reducing the amount you pay next time around. Here are a few easy ways to get a handle on your financial future – aka next year’s taxes.
Understand claiming dependents
When you know the rules, it can be a game changer. Let’s start with the basics. You can take a $4,000 exemption for each dependent. You also can claim their related expenses, such as child care, medical costs and tuition payments. However, if you share custody with someone, support an elderly parent or if a relative lives with you, things can be a bit complex. Sometimes, if you plan how much money you’re going to spend on the dependent and/or how many days the dependent lives with you, this can make a major difference in the tax benefits you reap.
The personal exemption is gone
The standard deduction has roughly doubled, but this doesn't mean that people are getting double the tax break – far from it, actually. While the standard deduction has increased, the personal exemption has gone away.
In the 2017 tax year, each personal exemption was an effective $4,100 (not $4,000 as above) tax deduction and there was no limit to the number of personal exemptions that could be claimed. For example, a married couple with six dependent children could claim eight personal exemptions. This was on top of the standard deduction.
Starting in 2018, everyone gets a much higher (basically double) standard deduction, but no more personal exemptions. In prior tax years, Americans could claim one personal exemption for themselves, their spouse and one for each dependent.
Try a tax calculator
This handy tool helps you anticipate the upcoming year. You can set up a variety of What If scenarios. If you have an income that’s variable, like a seasonal business or freelancing, you might set up high-, medium- and low-income situations and see how these affect your tax bottom line.
Consider bunching deductibles
Paying a major expense over a long period of time has its advantages, but you might get little or no tax benefit. With bunching, you pay more of one type of deductible expense in one year. For example, your child needs braces. The rule is that you can only deduct medical expenses after they exceed 10 percent of your adjusted gross income, or AGI; 7.5 percent if you and your spouse are over 65. If you pay the braces off over a couple of years, you may never reach your AGI ceiling. However, if pay for them in one year, you are more likely to get a tax break.
Put money into retirement all year long
While you can wait until right before you file next April to sock your money away into your IRA, let’s be honest: do you think, right now, you’ll have it ready to go? Rather than scramble at the last minute, contribute to your IRA every month, or whenever you can all year long. The amount will have longer to compound interest, plus you’ll be ahead when it comes to your retirement.
Think before you sell the big stuff
Let’s say you want to sell your house, but you’ve lived in it for only 18 months. If you wait until the two-year mark, you might qualify to exclude the capital gains on the sale from your taxable income. Better still, if you meet certain exceptions, such as being transferred to another city for your job, you could avoid paying taxes on the sale of your home. The IRS allows a reduced maximum exclusion due to changes in employment, health reasons or other “unforeseen circumstances.” (https://www.irs.gov/pub/irs-pdf/p523.pdf) The same principle applies to shares of stock and other capital assets: consider keeping them longer than a year. Why? You’ll pay lower capital gains tax rates.
When you prepare all year for the April deadline, taxes can be a lot less stressful and save you money. And when you think about it, who wouldn’t want that?