The Tax Cuts and Jobs Act was passed two years ago, and tax attorneys and accountants have spent that time looking for new tax breaks and other strategies for reducing your tax liability.
Basically, reducing your tax liability involves maximizing your potential deductions and tax credits while reducing the amount of your income that is subject to taxation. To do so, you may have to make strategic changes, and those changes need to be in place before Dec. 31.
Here are some of the available tax breaks and quick strategies to ensure you’re eligible:
20% tax deduction for qualifying small businesses
This year, some self-employed people and small businesses may be eligible for a 20% tax deduction. This depends in part on your field, how much you have invested in equipment and the amount you pay your employees.
That said, people below certain income thresholds automatically get this deduction. Those income thresholds are $160,700 for individuals and $321,400 for couples.
If you made just more than those thresholds, you may be able to reduce your taxable income to below the threshold level using other tax deductions. For example, max out your health savings account and any tax-deferred retirement accounts you have. If you’re self-employed, you can make contributions to a defined-benefit retirement plan and reduce your taxable income by as much as $225,000.
Deducting mortgage interest above the threshold
The mortgage interest deduction is now limited to mortgages of $750,000 or less. If you’re on the brink of buying a property above that threshold, consider using a mortgage for only part of the cost. If more than $750,000 is required, consider a separate lending transaction for the excess. The interest from this second loan can be deducted against your investment income.
Bunch up donations for several years
It used to be that a nice check to a charity at the end of the year could allow you to reduce your taxable income. The Tax Cuts and Jobs Act, however, increased the standard deduction to about $24,000 per couple. Most people simply don’t have enough deductions to exceed the standard deduction, meaning that itemizing isn’t necessary.
In order to get over that $24,000 threshold, some taxpayers are making donations to a donor advised fund. This allows you to give the money and take the corresponding deduction now, while distributing the money to a destination charity later on. If you know you plan to give $5,000 a year to a particular charity, you could choose to make five years’ worth of donations to a donor-advised fund and then direct the fund to distribute the money each year.
For more strategies to reduce your taxable income, contact a tax attorney.