By Bennett Whitlock, Whitlock Wealth Management
With the April deadline for filing taxes behind us, it can be easy to put taxes out of your mind until next filing season. Before you do, review your financial situation to see if you could benefit from early tax planning. A little organization today may help you reduce your 2017 tax burden. Review the five considerations below to see if payments or contributions you make this year could help you unlock tax savings:
- Retirement plan contributions
If you participate in a retirement plan through your employer, such as a 401(k) plan, consider maximizing pre-tax contributions to the extent you can afford it. In 2017, you can contribute up to $18,000 in pre-tax dollars to a workplace retirement plan, or $24,000 if you are 50 or older. Those dollars are deducted from your income before taxes are calculated, so it reduces your taxable income while you build savings for the future.
If a workplace plan is not available to you or if you’d like to save additional income for retirement, you can consider putting up to $5,500 annually in an Individual Retirement Account (IRA). You may contribute up to $6,500 to an IRA if you are age 50 and older. For traditional IRAs, you may be able to deduct those contributions from your current income, however those dollars will be taxed when they are withdrawn.
- Home ownership
Many Americans reduce their tax burden by using deductions related to home ownership. Interest payments you make on your mortgage loan as well as property taxes may be deducted from your income (if you itemize the deductions). Also, if you paid some interest upfront in exchange for a lower rate on your mortgage loan (also known as paying points), you may be eligible for additional tax breaks.
If you’re planning to make any changes to your housing situation this year, it’s important to consider how your taxes may be impacted before making any big moves. Downsizing as part of your retirement plan or purchasing a vacation home, for example, may have tax implications. Consult with a tax advisor for more information on how your current or future housing situation could affect your taxes.
- College education
There are several savings options you may be able to use if one of your financial goals is helping your children pay for college. Common options include Coverdell Education Savings Accounts, Uniform Transfers to Minors Act (UTMA) accounts, Uniforms Gifts to Minors Act (UGMA) accounts, tax-exempt savings bonds and 529 plans.
529 plans are a common tax-advantaged savings option because they are specifically designed to help families save for higher education. Contributions are not tax deductible at the federal level (but may be in certain states), however your earnings are permitted to grow tax free. You will not be taxed at the federal level (and in most cases at the state level) when the money is withdrawn for qualified higher education expenses. Keep in mind that there are advantages and disadvantages to each college savings option, and each one may impact your current financial situation and your child’s eligibility for financial aid differently.
When it’s time to pay tuition and other college expenses, you may qualify for one or more tax incentives. If you pay qualified higher educational expenses for yourself, your spouse, or student in the first four years of attending a post-secondary school, you may be able to claim up to $2,500 in tax credits. Unlike a tax deduction that reduces taxable income, a tax credit reduces your tax liability dollar-for-dollar. The American Opportunity Tax Credit is a valuable education related tax-saving strategy, but there are others as well.
- Job-related moving expenses
For most of us, tax savings are not a reason to seek a new job. Yet you may qualify for some tax savings if you find yourself with a different employer this year. Generally, the expense of seeking a new job is not tax deductible. However, if you seek a position in the same field of work, expenses may be deductible as a miscellaneous itemized deduction. (Taxpayers may only take miscellaneous itemized deductions to the extent that they add up and exceed two percent of your adjusted gross income.) If you meet certain requirements related to the length of your employment, the timeframe for when you start a new role and distance your new job is from your previous work location, you may be able to deduct moving costs. Expenses that can be deducted include the costs of using a moving company, transporting items yourself and travel to a new residence.
- Solar energy installation
Although a wide range of energy tax credits expired at the end of 2016, one is currently available for the cost of installing solar electric and water heating property in your primary or secondary residence. If you’re considering this option, see your tax advisor to discuss the tax credit details, including qualification requirements and amount.
Important tax reminder
The tax strategies and deductions available to you may vary based on your income and other circumstances in a particular year, and are not limited to the categories mentioned here. Consult with an accountant before adjusting your tax strategy.
Bennett C. Whitlock III, CRPC®, is a Private Wealth Advisor and Managing Director with Whitlock Wealth Management, a private wealth advisory practice of Ameriprise Financial Services, Inc. He offers fee-based financial planning and asset management strategies and has been in practice for 22 years. To contact him call 703.492.7732 or visit his website at whitlockwealth.com
12848 Harbor Dr., Suite 101 Lake Ridge, VA 22192.
Numerous proposals have been introduced which could potentially change federal tax laws in 2017 or later. The material presented here is based on current tax laws and regulations. Work with your tax advisor to monitor potential changes to tax law that may impact planning opportunities.
Neither Ameriprise Financial nor its affiliates or representatives may provide tax or legal advice. Consult your tax advisor or attorney regarding specific tax issues.
Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.
Clients should carefully consider the investment objectives, risks, charges, and expenses associated with a 529 Plan before investing. More information regarding a particular 529 Plan is available in the issuer’s official statement, which may be obtained from an Ameriprise Financial advisor. Investors should read the 529 Plan’s official statement carefully before investing.
Clients contributing to a 529 Plan offered by a state in which they are not a resident should consider, before investing, whether their, or their designated beneficiary(s), home state offers any state tax or other benefits only available for investments in such state’s qualified tuition program.
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