Tax season is traditionally thought of as the time of year when you owe money, but it can also be an opportunity to help you save. So, if you're feeling the heat of the tax dragon this spring, here are six tips to help you keep your cool – plus three ways to position yourself for success when next year's taxes are due.
1. Save money on tax return preparation.
If your household makes less than $66,000 annually, you qualify to use free software at MyFreeTaxes.com, a service sponsored by United Way. Notably, MyFreeTaxes.com offers free software for both federal and state returns. Or if you make less than $54,000, you can visit a Volunteer Income Tax Assistance site (VITA) and have your taxes done for free by IRS-certified volunteers.
2. Contribute up to $5,500 to an IRA.
This will reduce your 2017 taxable income and let your money grow tax-free until withdrawal. Contributions for 2017 can be made up to April 16, 2018. However, keep in mind that if you withdraw from an IRA before age 59 1/2, you'll incur a 10% penalty (on top of taxes) unless that money is used for college, medical expenses, or buying a home for the first time. On the flip side, IRA contributions can be a great way to save up to $10,000 for your first down payment on a house since they grow tax-free until withdrawal.
3. If you have an HSA (health savings account), contribute up to $3,400 for 2017.
You may have been contributing regularly to your HSA all year (perhaps you contributed a little bit each month or each week, or in one lump sum), but whatever you do, the limit for HSA contributions is $3,400 for the 2017 year, and you can max out this contribution for 2017 anytime before the April 2018 deadline. It's a good idea to max out this contribution if your employer offers an HSA and you can swing it, as this will reduce your 2017 taxable income and help you save for big medical expenses in the next few years, including insurance deductibles for major dental or orthodontic work, new eyeglasses, elective surgery, or the birth of a baby.
4. Don't procrastinate.
Filing your taxes early can not only help you get money back faster, but it can also actually help prevent ID theft. Once you use your Social Security number on your return, no one else can use it fraudulently on theirs. Even if you anticipate owing money instead of getting money back, you can file now and pay any time without interest before April 16, 2018.
5. Remember you may be able to deduct your student loan interest.
You can claim all the interest you paid during the tax year, including payments you've voluntarily made, as a deduction of up to $2,500, meaning you can lower how much of your income the government can tax by up to $2,500. For more information about deducting student loan interest, check out the IRS's explanation here.
6. Explore tax credits for continuing your education at an accredited institution.
Pursuing a master's? Upgrading your job skills at a local college? Studying to change fields? Even if you've graduated from college, you may be able to claim a Lifetime Learning Credit to reduce any federal taxes you owe. Check out this interactive tool from the IRS "estimated 10 minutes, start to finish" to find out if you're eligible.
Looking toward the future . . .
Here are some ways to make next year's taxes less painful and less frantic.
Start a 529 account to pay for education expenses for yourself, your spouse or even a child. It's never too early to start. 529 contributions may reduce your state taxable income now and will grow tax-free!
Automate savings to your 401(k), IRA, HSA or 529 account. Have your employer take it directly out of your paycheck or set up a recurring transfer from your bank account. Even saving $10 or $20 tax-free per week adds up, and you likely won't miss what you'd pay for a few cappuccinos or happy hour drinks. IRA and 401(k) savings (up to $10,000) can also be used for first-time home buying without penalty, while HSA funds can cover big medical expenses like dental work, orthodontic work, prescription eyeglasses and elective surgery.
Remember to set aside 25% of your income from side gigs for 2018 taxes. If you're an independent worker, you'll pay both your normal taxes plus taxes for Medicare and Social Security. Setting aside some of your earnings throughout the year will provide a cushion for having to pay these taxes next year.