Three Tips to Lower Your Taxes
by Mitchell J. Smilowitz, CPA
With tax season over, many of us breathe a sigh of relief and put the topic out of our mind until we receive our tax documents (Form-W2 or Form-1099) next January. But now is the perfect time to put strategies in place to reduce your tax burden for the rest of the year.
To that end, here are three tips you can use to keep more of your earnings in your own pocket.
Boost Your Retirement Savings.
One of the easiest and most effective ways to reduce your taxable income is to increase contributions to your JRB retirement savings account. Every dollar contributed to your JRB account reduces your taxable income by the amount you contribute – up to federal maximums. For 2017, the maximum salary reduction contribution is $18,000 ($24,000 for those age 50 and older).
In addition to reducing your taxable income in the year that you make the contribution, boosting your retirement savings has other benefits.
- Contributions to your retirement account strengthens your financial security.
- Investment gains accumulate tax-free in your JRB account.
- Investing in your retirement account over the long-term takes advantage of compounding, turning even small investments into significant retirement savings.
- When you withdraw the funds in retirement the contributions and earnings are subject to taxation but you likely will pay less tax as a result of being in a lower income-tax bracket.
- Retired clergy also are entitled to special benefits (please see sidebar).
Big Refund? Consider Changing Your Withholding
While many of us enjoy receiving a big tax refund, there’s another way of looking at it. A refund means you’ve given an interest-free loan to the government.
Rather than allowing the government to earn interest on YOUR money, consider reducing your withholding. The IRS has a handy calculator you can use to determine how many exemptions you can claim so that the amount of tax withheld from your paycheck more closely matches the amount you will owe at the end of the year.
Based on the results, you may need to submit a new Form W-4 to your employer. (You can download an editable version from the IRS website.) After filling it out, give it to your payroll supervisor. You can change your withholding amount at any time during the year.
PS – Reduce your tax burden further by investing a portion of the additional take-home pay into your JRB retirement account.
Itemized Deductions
If you itemize when filing your annual tax return, there are several deductions you can claim. Many of us are aware of the tax deductions for mortgage interest, real estate taxes and charitable contributions. But here are a couple of others you may be able to use.
In addition to the deduction for charitable donations, you can deduct other costs you incur in performing charitable activities. These include the miles you drive for charitable work and the mileage driven to the location for donating clothes, appliances, etc. (14 cents/mile in 2017). In addition, items you purchase when performing charitable activities, such as food and supplies, are deductible. By the time you file your taxes, this can add up to a significant deduction.
You also can deduct job-hunting expenses and the costs of moving to a new job if you itemize. This includes travel expenses (transportation, lodging and meals) incurred when exploring a job opportunity in a different location. And if you have to relocate for a new job, you may be able to deduct your moving expenses.
The IRS has more information on the rules governing these and other deductions. We urge you to consult with your tax advisor for guidance on your specific situation.
While there certainly are things you can do at the end of the year to reduce your tax burden, the strategies you put in place now make it easier and give you more flexibility to reduce the taxes you pay when filing your tax return next year.
