As was widely reported, the Tax Cuts and Jobs Act (the new tax law) made important changes to the tax code. These changes included different tax brackets and rates, dramatic changes to corporate taxation, doubling the estate tax threshold, amongst many others. The new tax law took effect December 22, 2017, and will mean many taxpayers will see more money in their paychecks for 2018. However, the new tax law does not apply for the taxes you owe for 2017 (those due on April 17, 2018). So how can you lower the amount of taxes you’ll pay for 2017 taxes and taxes going forward? Take a look at these five tips to find out.
Take Advantage of Tax-Deferred Investment Accounts
Generally a taxpayer is taxed based on their gross income, as we all know. The gross income is the amount you earn before taxes are taken. With a higher gross income, you are more likely to pay higher income taxes. Thus, one of the best ways to reduce your taxes is to reduce your taxable or gross income.
Tax-deferred retirement and education accounts are great ways to reduce your gross income. These plans work by allowing you to make pre-tax contributions to qualified plans such as a 401(k), IRA, or 529 college savings plan. You should note, however, that a 401(k) is a tax-deferred, not tax-exempt, plan. In other words, you must pay taxes on the income you receive from your 401(k) in retirement.
Donate to Charity
Charitable giving remains tax exempt under the new tax law and is one of the best ways to reduce your gross income. Although some legislators proposed eliminating the deduction for charitable giving, this favorable tax break was ultimately preserved. However, with the doubling of the standard deduction from $12,000 to $24,000, many charities are concerned charitable giving good drop as less people are anticipated to itemize their taxes. Take a look at this publication for IRS guidance on deductions of charitable giving.
Become a Parent
Parents received a sizable child tax credit in previous years and that important credit is not only preserved for 2018, it is doubled. This will likely mean more money in the pockets of families with children. For fiscal year 2018, the child tax credit doubles from $1,000 to $2,000 for each eligible child. To qualify, a child must be under 17 years of age, a U.S. citizen, live with you for more than half the year, and meet a few other criteria. The child tax-credit also phases out at higher incomes. To learn more about the child tax credit, visit this guide from the IRS.
Update your Estate Plan
While most tax savings are achieved during your lifetime, you can save your estate and heirs a great deal of money by having a well-crafted estate plan. For most people, retirement accounts should name people as beneficiaries instead of their estate. If your will leaves money to those in a high income-tax bracket or those with a lot of debt or judgment liens, consider seeking the advice of a trusted estate planning lawyer to minimize the burden to your heirs.
Utilize Long-Term Capital Gains Exclusions on Home Sales
Long term capital gains are owed on positive gains for investments held longer than one year. This includes most residential main homes. For most tax brackets, the long term capital gains tax rate is 15%. Your gains are the difference between purchase and sale price for your property. However, for home sales meeting certain criteria, the first $250,000 (or $500,000 for married couples and qualifying widows/widowers) is excluded. Seek the guidance of a trusted attorney or tax professional when you have capital gains.