It may be a few weeks into 2018, but there are still a handful of tax moves you can do now. Here are seven to consider.
Spend Healthcare FSA Money
Don’t waste any pre-tax funds in your healthcare flexible spending account (FSA). In some cases, you must use all that FSA money within the same calendar year, or risk losing it. But some employers offer a grace period or carryover amount, so leftover funds can be spent in 2018.
With a grace period, you have two and a half more months to incur healthcare expenses that can be paid by 2017 FSA funds. Once the grace period expires, any unspent money is forfeited. Alternatively, some employers allow $500 of unused 2017 FSA funds to roll over into the next year. Any funds over $500 at year-end are forfeited.
Healthcare FSA funds can be used to pay for dental, vision, or other doctor visits. FSA money also covers co-pays, exams, x-rays, lab services or healthcare expenses such as:
- Contact lenses and solution
- Prescription glasses or sunglasses
- Sunscreen with SPF 15 and over
- OTC reading glasses
- Flu shot
- First-aid kits
- Pregnancy test
- Bandages and other wound care
Other employers offer only a run-out period that gives employees 90 days in 2018 to request reimbursement for 2017 healthcare expenses. Some plans with a grace period or carryover feature also offer a run-out period. Check with HR to find out the details of your FSA plan.
Max Out Retirement Accounts
While it’s too late to increase your 2017 contributions to your employer-sponsored 401(k) and 403(b) plans, you can still contribute to other retirement plans for last year, thus lowering your 2017 taxable income. Here’s how: Solo 401(k)s and SEP IRAs:If you’re self-employed and have a solo 401(k) plan or Simplified Employee Pension (SEP) IRA, you can make extra contributions to either plan this year as an “employer” until the due date for your business income tax return, including any extensions. These “employer” contributions are tax deductible for the 2017 year.
Traditional IRAs: You have until April 17, 2018—or tax day—to make contributions to these plans up to the maximum: $5,500 or $6,500 if you’re over 50. These contributions are tax deductible. This is the same deadline for Roth IRA contributions, which are not tax deductible.
Max Out Health Savings Accounts (HSAs)
If you didn’t max out your HSA in 2017, then you have until tax day to do so. These tax-advantaged savings accounts are available if you have a high-deductible healthcare plan and can be used as a retirement investment tool if you don’t use the funds. The maximum 2017 contribution is $3,400 for individuals and $6,750 for families. Those who are older than 55 can put in an extra $1,000 above the maximum. These contributions are also tax deductible, earn tax-free interest and have tax-free withdrawals for qualified medical expenses.
Take Your First Required Minimum Distribution
If you reached 70.5 years old in 2017, you’re required to take your first minimum distribution from any retirement plan—except a 401(k) at a current employer—by April 1 of this year. This distribution is taxed as income and is calculated based on your account balance and life expectancy. Typically, your account provider calculates the amount you must withdraw each year. If you fail to make the minimum withdrawal, you will pay a tax penalty of 50% plus interest on distributions you should have taken.
Make a 529 Contribution in Certain States
There are seven states where you can still make 529 plan contributions this year and deduct them from your 2017 state tax returns.
Georgia: Residents have until their state tax-filing date (April 17) to make contributions to their in-state 529 plans, up to $2,000 per beneficiary.
Iowa: Residents have until April 30 to make contributions to their in-state 529 plans, up to $3,239 per beneficiary. Account owners must make the contributions.
Mississippi: Residents have until their state tax-filing date (April 17) to make contributions to their in-state 529 plans, up to $10,000 for a single return and up to $20,000 for a joint return.
Oklahoma: Residents have until their state tax-filing date (April 17) to make contributions to their in-state 529 plans, up to $10,000 for a single return and up to $20,000 for a joint return. There is also a five-year carryforward of excess contributions.
Oregon: Residents have until their state tax-filing date (April 17) to make contributions to their in-state 529 plans, up to $2,330 (for 2017) for a single return and up to $4,660 for a joint return.
South Carolina: Residents have until their state tax-filing date (April 17) to make contributions to their in-state 529 plans up to the maximum account contribution limit of $426,000.
Wisconsin: Residents have until their state tax-filing date (April 17) to make contributions to their in-state and out-of-state 529 plans, up to $3,140 per beneficiary per year. Contributions above the maximum can be carried forward.
Add Up Your Healthcare Expenses Again
If you had many expensive medical costs last year, it may pay to add up those receipts again. The total may be enough for a tax deduction, given changes in the recent tax reform. Under the new bill, if your out-of-pocket medical expenses exceeds 7.5% of your adjusted gross income, you can deduct those expenses on your 2017 federal tax return. That’s lower than the previous threshold of 10%. This minimum level also holds for the 2018 tax year.
Reverse a 2017 Roth IRA Conversion
If last year you converted a traditional IRA into a Roth IRA—to take advantage of tax-free and flexible withdrawals in retirement—but now want to reverse it, you have until Oct. 15 to do so. There are good reasons you might want to reverse a conversion, a process called recharacterization:
- The value of the Roth IRA investments has fallen since the conversion.
- You have higher-than-expected taxable income or the income from the Roth IRA has kicked you into a higher tax bracket.
- Or, you don’t have enough money to pay the conversion’s taxes this year. You typically must pay taxes on the traditional IRA’s earnings and pretax contributions at your income tax rate.
- No matter the reason, this is the time to do it. The tax reform bill passed in December eliminated recharacterizations starting with the 2018 tax year.