In Mark 12:17, we hear the story about the Pharisees trying to trick Jesus by asking him the question, “Is it right to pay the imperial tax or not?” If Jesus said “No” then he would be considered an enemy of Rome and if he said “Yes” his reputation with the people would be undermined. As in all Bible stories, Jesus answers the question, but in an unexpected way. He asked for a Roman coin, looked at the image of Caesar on the coin and replied “Repay to Caesar what belongs to Caesar and to God what belongs to God.”
Just like the individuals in the Bible, we are also required to pay to the government what is due to them in the form of taxes. And although filing your income taxes is a once a year event, taking advantage of every legal means available to reduce your taxes is a year round event.
If you pat yourself on the back each year when your tax refund is received, you should rethink your strategy. A big refund means that you’re having too much tax taken out of your paycheck every payday. A refund of $2,400 (which is about average) means you are loaning the government $200 each month – and they are not paying you interest for the privilege of using your hard earned money.
Go to the IRS website to calculate the various tax exemptions available to you, so you can determine if you should file a new W-4 form with your employer. You’ll need some information, such as your pay stubs and most recent tax return in order to calculate it properly.
The purpose of changing your W-4 to accurately calculate the number of deductions you should take allows you to remain tax neutral. You won’t have to pay much but you won’t get much back either. And being tax neutral will put more money in your pocket every month.
One of the best ways to lower your tax bill is to reduce your taxable income by contributing to an employer sponsored retirement fund. You can contribute to up to $18,000 to your 401(k) or similar retirement savings plan in 2017. If you will be 50, or older, by the end of the year you can contribute an additional $6,000 as a catch up allowance. Money contributed to a 401(k) is taxed when you withdraw it so it is not included in your taxable income in the year you earn it.
The other types of retirement savings that are widely available are a Traditional IRA and Roth IRA. You can contribute a maximum of $5,500 for 2017, or an additional $1,000 if you are over 50 for a catch up allowance. While the contribution limits are significantly lower than those of 401(k)s, IRAs can be a good addition to your retirement strategy as you can choose the type of investment you prefer—stock, bond, or mutual fund.
Both types of IRA accounts allow your investments to grow and compound on a tax-deferred basis, meaning you won’t have to worry about paying taxes on capital gains and dividends each year. But there is a difference.
Traditional IRAs work like most 401(k) plans. Contributions may be tax-deductible depending on your income, but your eventual withdrawals will be treated as taxable income and there is a minimum distribution required when you reach a certain age. Roth IRA contributions are made on an after-tax basis. You won’t get a current-year tax deduction, but qualified withdrawals will be 100% tax-free.
Take advantage if your employer offers a health care flex plan (medical reimbursement account). This type of plan allows you to direct some of your salary into an account earmarked to pay medical bills. You’ll avoid both income and Social Security tax on the money and those medical bills won’t be such a drain on the monthly budget.
Any improvements to your home or vehicle made for medical reasons may also be deductible as medical expenses. Keep detailed records of any changes such as adding hand controls to a vehicle, or putting a wheelchair ramp in your home.
If you are job hunting, keep track of your expenses. As long as you are searching for a new job in the same line of work, you can deduct job-hunting costs (travel, lodging and transportation) if your job search takes you away from home overnight. Such costs are miscellaneous expenses, and can be deductible if they exceed 2% of your adjusted gross income.
Once you get that new job, keep track of your moving expenses. You can deduct the cost of the move if your new job is at least 50 miles further from your old home than your old job was.
A child born to you or adopted is a blessing to both you and your family as well as your tax return. An added dependency exemption will reduce 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.
A tax credit is available for child and dependent care. This tax credit allows you to save one-third or more of the cost, since you avoid both income and Social Security taxes. If you have dependent care expenses and your employer offers such a plan, take advantage of it.
Save for college costs and avoid taxes at the same time by using a state sponsored 529 plan. With a prepaid tuition plan, you can pay tuition in advance, many years before the student actually enrolls. Prepaid plans allow you to pay for tomorrow’s education at today’s prices. There may be residency requirement as well as limits on what the plan will cover so buy carefully.
Be sure to talk to your tax preparer and check out the IRS rules if any of these scenarios apply to you. As with all things related to taxes, there are more level of details than can be listed here. Take time to validate the applicable deductions and the amounts for which you are eligible.
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! If you are carefully keeping track of your income and expenses there are many ways to save on your taxes all year long and avoid a big tax bill on April 15th.