Due to pending tax reform, making smart tax moves may be even more important this year. Laura reviews five ways to save money based on the current tax law and what’s proposed for the future.
The end of the year is always a busy time with holiday preparations and celebrations. New Year’s Eve is also the end of the tax year, which is a critical deadline for your personal finances and last-minute opportunities to save money.
But this year making smart tax moves may be even more important due to pending tax reform. The Senate and the House each passed their own tax bills, and the administration’s next step is to reconcile them into a single bill that President Trump can sign by the end of 2017.
If legislation passes, there will be changes for the 2018 tax year and beyond. While we don’t know exactly what the final reforms will be, use these five ways to save money based on the current tax law and what’s proposed for the future.
Tax Reform Tips: The Best Moves to Save Money Now
- Defer income to next year.
- Prepay deductible expenses.
- Make a charitable donation.
- Max out a workplace retirement account.
- Manage your flexible spending arrangement (FSA).
Here's more detail about each of these money-saving strategies.
1. Defer income to next year.
There may be fewer tax brackets and lower rates for many Americans next year due to tax reform. So, if you have income that you can control, consider waiting until 2018 to receive it so you owe less in taxes compared to this year.
For instance, if you have self-employment income from a small business or freelance work, you could delay billing customers or clients. If you’re an employee who earns commissions or a year-end or quarter-end bonus, find out if they can be paid next year.
2. Prepay deductible expenses.
Prepay as many deductible expenses as possible so you can take advantage of them before they disappear or become much more difficult to claim in the future.
Tax reform may eliminate or reduce many existing tax deductions. Some require you to itemize deductions on your tax return and others don’t.
So, another smart year-end tax strategy is to bunch up as many deductions as you can this year. Prepay as many deductible expenses as possible so you can take advantage of them before they disappear or become much more difficult to claim in the future.
Here are some deductible expenses to consider paying before the end of the year:
Medical expenses: These are deductible up to certain limits now, but could be eliminated or reduced. So, take care of as many of your family’s medical, dental, vision, and hearing needs as possible before the end of the year. Set appointments and pay for prescriptions or other deductible expenses as soon as you can.
State and local income taxes: These are deductible now, but could also be eliminated or reduced. If you’re a homeowner, why not make your property tax payment for 2018 ahead of time? You’ll make sure to get another tax deduction and perhaps an early-pay discount, too. If your state charges income tax, you could also pay it this year instead of waiting for the deadline in 2018.
Home mortgage interest: This is deductible now, but could become difficult to qualify for due to tax reform. Consider paying your January mortgage payment by December 31 so you have an extra chunk of interest to deduct for this year.
Student loan interest: This is currently deductible up to certain limits, even if you don’t itemize deductions. However, this tax benefit may be eliminated, so prepay your January student loan payment by December 31 and get a little more tax savings for the current year.
3. Make a charitable donation.
When you make a donation to a qualified charity, you may also be eligible for a tax deduction, if you itemize. That’s a winning combination in my book!
Tax reform may allow charitable deductions, but make itemizing more difficult or less worthwhile in the future. So, if you want to make a charitable donation, this may be the best year to do it.