Some people think that paying income tax to the government is not biblical, but remember the verse from Mark 12:17: “So Jesus said to them (the Pharisees), ‘Repay to Caesar what belongs to Caesar and to God what belongs to God.’ They were utterly amazed at him.”
Filing your tax return is a once-a-year event but to get the best tax savings you need to have a year-round approach, which can save you a ton of money.
Here are several ideas you can implement now to help your tax situation for years to come.
Be sure to do the calculations to figure out if you should take the standard deduction or itemize your return. About 7-in-10 people opt for the standard deduction when they file their tax returns, according to the Internal Revenue Service.
For the tax year 2017, that means electing a fixed tax break of $12,700 if they are married and filing jointly or $6,350 if filing individually. A big advantage of the standard deduction is that it’s available to all Americans with no extra paperwork required.
However, a few expenses can qualify you for a bigger reduction in your tax burden if you simply take the time to itemize them and file the proper forms.
When deciding whether or not to itemize, remember that you will be giving up the standard deduction if you itemize. Therefore, after adding up your itemized deductions, make sure the total is greater than the standard deduction for your filing status. If it’s not, then you will actually pay more in tax if you itemize. If itemizing means more in deductions then it is worth doing the calculations.
Are you going to get a big refund check this year? Why? A big refund means that you’re having too much tax taken out of your paycheck every payday. You are basically loaning your hard earned money to the government and they are not paying you interest on the loan. If you are getting the average refund of $2400, you could increase your income by $200 each month by changing your deductions.
The goal is to try and be tax neutral, so you don’t get back much but you also don’t have to pay much. Google W4 withholding calculators to determine if you need to adjust the number of deductions you are taking on your W4 form. Claiming more dependents will put additional dollars in your monthly paycheck. Try a few and see how the results compare with each other. Then talk to your payroll office and if it makes sense, file a new W-4 form with your employer.
As you spend money during the year and enter it into your budget, mark those items that are deductible. You can do that with software, an app or if you like the manual method, keep the receipts that are deductible in a specific location. Organizing this information throughout the year makes it a lot easier when tax time rolls around.
State and local taxes can be deducted on your federal return. If you live in a state with high rates for personal property, income tax, sales tax or real estate tax, you may be able to lower your federal tax bill by itemizing.
Many homeowners can lower their taxable income by deducting interest paid on the home mortgage. But having a mortgage simply to have a tax deduction does not make financial sense, since you can only deduct a portion of the interest paid.
One of the best ways to lower your tax bill is to reduce your taxable income. You can contribute up to $18,000 to your 401(k) or similar retirement savings plan for the 2017 tax year. If you are 50 or older by the end of the year you can contribute up to an extra $6,000 as a catch-up allowance. The allowance for IRA deductions will change, based on your income and if you have a retirement plan through your employer. So be sure to check the rules.
Be aggressive if your employer offers plans which allow you to use pre-tax dollars for medical bills or child care costs. The money that goes into these accounts is pre-tax dollars so you avoid both income and Social Security tax on the money, and that can save you 20% to 35% or more compared with spending after-tax money.
If you are unemployed, underemployed, or just looking for a new job, make sure you keep track of your job-hunting costs. You can deduct job-hunting costs including travel expenses such as the cost of food, lodging, and transportation if your search takes you away from home overnight. Such costs are miscellaneous expenses, deductible to the extent all such costs exceed 2% of your adjusted gross income.
If you get that new job and it’s at least 50 miles farther from your old home than your old job was, you can deduct the cost of moving yourself and your belongings.
A child born, or adopted, is a blessing from God and also a tax break. An added dependency exemption will knock $4,040 off your taxable income, and you may be able to qualify for the $1,000 child credit, based on your income and other factors as defined by the IRS.
Thousands of dollars of expenses incurred in connection with adopting a child can be recouped via a tax credit, so it pays to keep careful records. The credit can be as high as $13,570. If you adopt a special needs child, you get the maximum credit even if you spend less.
Using a state-sponsored 529 college savings plan can make earnings completely tax free and allows you keep control over the money. If one child decides not to go to college, you can switch the account to another child or take it back.
Improvements to your home can be deducted from your income as medical expenses if they are medically necessary. The cost of installing entrance or exit ramps, modifying bathrooms, lowering cabinets, widening doors and hallways and adding handrails, are home improvements that can be deducted as medical expenses. But the deduction amounts must be based on medical necessity. Additionally, any amounts spent on these improvements that increase the value of your home cannot be claimed as a medical related expense.
In addition to the cost of getting to and from the doctor, you can deduct up to $50 a night for lodging if seeking medical care requires you to be away from home overnight. The $50 is per person, so if you travel with a sick child to get medical care, you can deduct $100 a day.
You can see from these ideas that saving money on your taxes is a year-round effort. If you are keeping track of your income and expenses there are many ways to save on your taxes all year long and be better prepared when tax time rolls around next year.
At the start of this blog, we quoted Mark12:17 where Jesus said to pay to Caesar what belongs to Caesar. But if Caesar creates rules that allow you to pay less . . . then take advantage of those opportunities!
For more, listen to the Compass Catholic Podcast on Podbean.