Tax Tips

Tip 1 – Defer Income in Retirement Accounts

There are numerous savings plans that allow you to contribute current income toward your retirement.  This income is not taxed during 2017, only when you withdraw the money from your retirement account in a later year.  The most common plans are 401(k), 403(b) or 457 plans.  These employer-sponsored plans often have the added bonus of employer matching contributions.  Many IRA plans also offer this tax-deferred status as well.

Tip 2 – Defer Income/Accelerate Expenses

While this is not always possible, sometimes it is.  Remember your tax return is on a “cash basis”.  If you did not effectively receive the income in 2017, you can defer it into 2018.  Or if you write the check this year for the deductible expense on December 31st you can deduct it.  This knowledge is especially helpful for self-employed individuals.  Changing the timing of your billing or receipt of income (like a bonus check) can make a big difference in your taxable income.

Tip 3 – Effectively Use Capital Losses

Each year you can write off up to $3,000 in excess capital losses (i.e. stock loss) as an offset to income.  Capital losses are first offset against capital gains, but excess losses up to the $3,000 limit can eliminate high tax rate ordinary income.  Better still, if you have a capital gain from a property you held for less than one year, you could offset this gain from an investment loss up to the total gain amount!  The tax benefit is often much lower if your capital loss is used to offset long-term capital gains.

Tip 4 – Open a Health Savings Account (HSA)

This relatively new health insurance benefit allows you to set up an IRA-like account to pay for medical and dental expenses.  Any funds at the end of the year that are not used to pay for qualified medical expenses can be invested and carried over into future years.  To qualify for an HSA you must be in a high deductible health insurance program.  Other limitations apply.

Tip 5 – Use Employer Spending Accounts

Employers often offer you the ability to pay for health care and dependent care expenses through spending accounts.  The benefit of these accounts is you can pay for qualified day care and medical expenses using pre-tax dollars.  You sign up for this benefit with your employer each year.  The income you set aside in these accounts reduces your income, but the funds must be used each year or you will lose the unspent money.


Tips to Save for College

Tip 1 – Open a College Savings Plan

These tax-favored plans referred to as Qualified Tuition Programs (QTPs) and Prepaid Tuition Plans offer a tax benefit on earnings put aside for college.  With these plans you put after-tax money away to fund someone’s education.  As long as the funds are used to pay for qualified education expenses any earnings on the funds are tax-free.  But be careful, as money used for ineligible expenses are subject to federal taxes plus a 10% penalty.  The strength of these programs is that anyone can contribute to the plan and the annual contribution limits are set at the annual gift limit (currently $12,000 per year).

Tip 2 – Consider Coverdell ESAs

These accounts behave like an IRA but the funds are used to pay for educational expenses. The funds accumulate tax-free as long as they are used for education.  You may put aside $2,000 per year for each qualified designated beneficiary (student).  Contributions can be made by April 15th of the following year for a beneficiary under age 18.  Funds must be used or transferred to another qualified beneficiary at age 30.

Tip 3 – Use Savings Bonds

For an easy and safe way to sock away money for future education expenses look to qualified U.S. Savings Bonds.  The qualified savings bonds are Series EE (the fixed rate variety) and Series I (indexed to inflation).  Federal taxes are deferred until you cash the bond, but if you redeem them to pay for higher-education expenses, the earnings (bond interest) may also be tax-free.

Tip 4 – IRA Distribution (Penalty-Free)

You may take early distributions from you IRA to help pay qualified educational expenses for yourself, your wife, child, or grandchild.  While you will need to pay tax on the income (not if from a qualified Roth IRA), you will not be subject to the 10% early withdrawal penalty.