Are you ready for tax day? There are only a few days left until the Tuesday, April 17 deadline for individuals, sole proprietors and C corporations. Not quite ready? Don’t worry, there’s still time (if you hustle) to make some moves that can possibly save you money in federal and state taxes for 2017. Here are three ideas you can use right now:
1. Deduct State and Local Sales Taxes. As an individual, you can deduct either a) state and local income taxes, or b) state and local general sales taxes. If you live in a state with low or no personal income tax or if you owe little or nothing to the state, you can elect to deduct state and local sales taxes in place of state and local income taxes. If you choose to do this, your tax preparer will use a table to from the IRS to calculate your deduction. It bases your deduction on your income, personal and dependent exemptions, and state of residence. If you kept receipts from all of your 2017 purchases, you can add up the actual sales tax amounts paid and deduct that total, which may give you a larger write-off. Even if you use the IRS table, you can add sales tax amounts from major purchases, including motor vehicles, boats, aircraft, and home improvements. You can deduct actual sales taxes for these major purchases in addition to the predetermined amount from the IRS table.
2. Make a Deductible IRA Contribution If have yet to make a deductible traditional IRA contribution for the 2017 tax year, you can do so up until the tax filing deadline of April 17, 2018 and claim the write-off on your 2017 return. You can make a deductible contribution of up to $5,500 (or $6,500 if you were age 50 or older as of December 31, 2017). If you’re married, your spouse can potentially do the same, which will double your write-off.
There are three ground rules for deductible IRAs. First, you must have enough 2017 earned income (from jobs, self-employment or alimony received) to equal or exceed your IRA contributions for the 2017 tax year. If you’re married, either spouse (or both) can provide the necessary earned income. Second, you can’t make a deductible contribution if you were 70½ or older as of December 31, 2017. Third, deductible IRA contributions are phased out (reduced or eliminated) if last year’s income was too high.
3. Establish a SEP IRA. If you own a small business and you don’t have a retirement plan, you can set up a simplified employee pension (SEP). A SEP can be created in the current year and generate a deduction on last year’s tax return. In fact, if you’re self-employed and extend your 2017 return, you have until October 15, 2018, to submit the paperwork and make a deductible contribution for last year.
Your deductible contribution can be up to 20 percent of your 2017 self-employment income or up to 25 percent of your 2017 salary if you work for your own business. The maximum amount you can contribute for the 2017 tax year is $54,000. You can realize substantial tax savings with a SEP. For example, if you are self-employed and in the 28 percent federal tax bracket, if you make a $30,000 deductible SEP contribution on April 1, 2018, you could lower your 2017 federal income tax bill by $8,400 (plus any state income tax savings).
On thing you should know. You may not want to establish a SEP if your business has employees. The IRS requires you to make contributions to their accounts. If you have employees, discuss the pros and cons with your financial and legal advisors before setting up a SEP.
If your business made improvements to real property in 2017, you might qualify for a special Section 179 deduction.
The Sec. 179 deduction privilege often allows eligible businesses to deduct the entire cost of depreciable asset additions in the year they’re placed in service. For 2017, the limit is $510,000. However, this break is phased out dollar-for-dollar for qualifying purchases over $2.03 million in 2017. So, Sec. 179 deduction is not available if your total investment in qualifying property was above $2.54 million for 2017.
Armed with this information, now it’s time to contact your tax preparer! Better that than suffering any penalty you may be subject to for not filing on time!