In just weeks, the U.S. government wants its money. And it’s best to be well prepared.
No one has ever been a big fan of taxes. But we have no choice. It is what it is. It’s one of life’s certainties next to death. Unless – of course – there are those of you that thoroughly enjoy tax penalties, interest, wage garnishments, or friendly visits from government officials.
While we typically talk about technical patterns here, we wanted to offer some key advice when you move to file your return. First, remember this. You will see a change to your taxes this year from the tax reform recently signed by President Trump. Plus, your standard deduction will get significantly better too, moving from $6,350 to $12,000 for single filers. Married couples filing jointly can claim $12,700, and taxpayers filing as "head of household" (single individuals with dependents) can claim a standard deduction of $9,350.
No. 1 – You must report all income
One of the easiest ways to get visited by your friendly neighborhood IRS agent is to hide income, thinking the government won’t find out. It’s not like they’ll single you out. You’re one of 308 million Americans. They won’t notice is the thought. But don’t try it. It will not end well for you, or your wallet. As always it’s important to check with a good accountant.
No. 2 – Understand your tax credits
Unlike deductions, tax credits can reduce your liability dollar for dollar. A $2,000 child tax care credit for example is deducted from your tax bill in full, dollar for dollar. There are tax credits for parents, including the child tax care credits. Students should still be able to claim credits for the American Opportunity Tax Credit and the Lifetime Learning Credit, as well as student loan interest deductions.
No. 3 – Contribute to your Retirement Accounts
It’s always important to use retirement accounts, allowing folks to take advantage of breaks. Contributions to a traditional IRA or 401(k) – for example – can reduce taxable income and allow for tax-deferred growth (pay when the money is taken out). A Roth IRA “doesn’t allow to deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals in retirement,” according to CNN Money.
No. 4 – Don’t overpay on capital gains taxes
Over the last several years, the stock market has exploded in value, rewarding short-term and long-term investors. But it’s the government that’ll come out as one of the big winners from those pesky capital gains taxes we’ll all have to pay out. Profits from investing in stock can be taxed with capital gains taxes and dividend income tax. A capital gain tax happens when you sell a stock for profit. This is calculated by finding the difference between your cost basis -- or the original value of the stock – and your sales price. For example, if you bought a stock at $2 and it ran to $10, the capital gain tax applies to the $8 profit just made.
If the difference between cost basis and sales price falls into the red, you lost money. There now exists a capital loss, which can be used to offset capital gain. It actually pays to lose money. How about that?
No. 5 – Donate to Charity
According to Fox Business:
“Under the new tax bill, deductions can be made by an individual taxpayer to public charities of up to 60% of income, an increase of 10 percentage points over the previous allowance. This change can provide an opportunity for some taxpayers to save a significant amount of extra cash this year.”
As always, it’s best to check with a well-versed accountant, though.