Smart Moves for Your 2017 Tax Return
This is may be your last chance to claim some tax deductions. We help you make the most of them.
Excited about the new tax law? Well, keep calm as you sit down to do your 2017 return. With just a couple of exceptions, neither the promising nor the threatening changes will affect the bottom line on the forms due this April. If you itemized in the past, you'll probably itemize again. And if your personal situation in 2017 was similar to what it was the year before, your tax bill probably won't change much, either.
However, if you took steps toward the end of 2017 to prepare for the new law, you may encounter some speed bumps on the road to filing your tax return. Luckily, you'll have a couple more days to figure things out. Because April 15 is on a Sunday and April 16 is a holiday in Washington, D.C., you have until April 17 to file your federal tax return. But don't use that as an excuse to procrastinate. Filing early is the most effective way to prevent identity thieves from stealing your refund. Getting a jump on your return also reduces the risk that you'll make errors that could cost you money or attract unwanted attention from the IRS.
Get rewarded for philanthropy. While the new law preserves the deduction for charitable contributions, fewer taxpayers will benefit from it after 2017 because more people will claim the standard deduction (see Charitable Giving Under the New Tax Law). With that in mind, many taxpayers increased their charitable giving at the end of 2017. Schwab Charitable, a donor-advised fund that allows donors to make deductible contributions in one year and distribute the funds later, says 91% more accounts were opened during the last six months of 2017 than over the same period in 2016.
If you ramped up your giving in 2017, make sure you have records to support your donations in the event of an IRS audit. For gifts of less than $250, you should have a canceled check, credit card receipt, bank record or acknowledgment from the charity showing the date and amount of your contribution. If you made contributions through payroll deduction, keep copies of your pay stubs.
For gifts of more than $250, you should have a written acknowledgment from the charity showing the amount and date of the contribution, along with an assurance that you didn't receive anything in exchange for your contribution.
Don't overlook noncash donations that could increase the size of your charitable deduction. Although you can't deduct the value of your time when you volunteer, you can deduct volunteer-related expenses. So if you drive, for example, you can write off 14 cents a mile, along with parking and tolls. You can also deduct the cost of items you buy for a charity, such as food for a soup kitchen.
Finally, be sure you claim credit for any noncash donations you made to Goodwill, the Salvation Army or similar charities. You can deduct donations of used clothing, household goods, books and other items based on their fair market value, which the IRS defines as the price a buyer would pay for the items. Tax programs such as TurboTax include tools that will help you estimate the fair market value of donated items; the Salvation Army offers a value guide.
Deduct medical expenses. The tax overhaul did make a change to the 2017 rules that could help families with large medical expenses. For 2017, you can deduct medical expenses that exceed 7.5% of your adjusted gross income, down from a previous threshold of 10%. The 7.5% threshold will remain in effect for 2018; after that, it will return to 10%.
If you had a lot of out-of-pocket medical expenses last year--for long-term care, for example, or a family member's serious illness--it's worth gathering up your receipts and records. Co-payments, the cost of prescription drugs and treatments that aren't covered by your insurance (including dental and vision care) are all deductible. You can include your own expenses as well as those of your spouse and anyone you claim as a dependent.
Set up an HSA. Contributing to a health savings account is one of the most effective ways to save for health expenses down the road. It's also one of the few opportunities still available to lower your 2017 tax bill.
You have until April 17, 2018, to set up and fund an HSA for 2017. If you had an HSA-eligible health insurance policy (with a deductible of at least $1,300 for individual coverage or $2,600 for family coverage) for 2017, you qualify. Even if you didn't have an HSA-eligible policy for the full year, you can still make the full year's contribution (up to $3,400 if you had single coverage or $6,750 if you had family coverage) as long as you had it on December 1 and you keep an HSA-eligible policy for all of 2018. You can contribute an additional $1,000 if you were 55 or older in 2017; if your spouse was at least 55, he or she can also contribute an extra $1,000.
Contributions to an HSA will reduce your adjusted gross income. The money in your account will grow tax-free, and withdrawals used to pay medical expenses are tax-free, too.
Contribute to an IRA. You also have until April 17 to contribute to an IRA for 2017. If you're not enrolled in a workplace retirement plan, you can deduct an IRA contribution of up to $5,500, or $6,500 if you're 50 or older. As is the case with an HSA, your contributions to a traditional IRA will reduce your adjusted gross income on a dollar-for-dollar basis, which could also make you eligible for other tax breaks tied to your AGI.
Workers who have a company retirement plan but earn below a certain amount may qualify to deduct all or part of their IRA contributions. For 2017, this deduction phases out for single taxpayers with AGI of between $62,000 and $72,000; for married couples who file jointly, the deduction phases out between $99,000 and $119,000.
If one spouse is covered by a workplace plan but the other is not, the spouse who isn't covered can deduct the maximum contribution, as long as the couple's joint AGI doesn't exceed $186,000. A partial deduction is available if the couple's AGI is between $186,000 and $196,000.
Don't overlook state tax breaks. State taxes often take a back seat to federal taxes, which involve larger sums of money. But in the rush to meet the tax-filing deadline, don't miss credits and deductions that could lower your state taxes, says Cari Weston, director of tax practice and ethics for the American Institute of Certified Public Accountants. Those state tax breaks will be even more valuable in the future because the new tax law caps the amount of state income and property taxes that itemizers can deduct. But there's no cap for the write-off on the return you're working on now.
Some of the most common state tax breaks are designed to help retirees pay their property taxes. For example, Mississippi homeowners who are 65 or older are eligible for a property tax exemption on up to $75,000 of assessed value. (For more information on state tax breaks for seniors, check out Kiplinger's Retirement Tax Map.)
More than 30 states provide tax deductions and credits for contributions to state-sponsored 529 college-savings plans. Arizona provides tax credits worth up to $200 ($400 for a married couple) to offset fees for extracurricular activities at K-12 public and charter schools.
Other states offer credits and deductions to residents who adopt a child, restore a historic home, or designate a portion of their property as farmland or open space. You can get more info from your state treasurer's office or the instructions for your state tax return. Be sure to take advantage of any benefits you're due for your activities in 2017.
Prepaid property taxes: Deductible or not?
The last week of December is usually a quiet time for county treasurer's offices, but that wasn't the case last year. In places such as Montgomery County, Md., and McHenry County, Ill., taxpayers stood in long lines to prepay their property taxes before December 31.
The catalyst was a provision in the tax law that caps the amount of state income, sales and property taxes that taxpayers can deduct at $10,000. The law specifically stated that taxpayers couldn't prepay their 2018 state income taxes, but it didn't address property taxes. That prompted homeowners in high-tax states to try to prepay as much of their 2018 taxes as possible so they could deduct them on 2017 returns.
But just because you wrote a check for your 2018 property taxes by New Year's Eve doesn't mean you can deduct them. The IRS says 2018 property taxes are deductible on a taxpayer's 2017 return only if the taxes were assessed before December 31. Payments based on an estimate of your 2018 taxes aren't deductible, even if your county accepted the money.
If you prepaid a portion of your 2018 taxes based on an assessment issued in 2017, keep a copy of the assessment for your records, says Gil Charney, director of policy analysis at H&R Block's Tax Institute. In the event of an audit, that will support your claim that the deduction is legitimate, he says.