Friday’s Frugal Five, Tax Edition: Five Ways We Minimized Our Tax Bill

I filed our taxes this week!  Yes, I’m a super nerd who enjoys plotting and scheming and figuring out my deductions.  And we usually get our taxes done early so we can sock away our tax refund.

In the personal finance community, there is a lot of this:

“You don’t want a tax refund!  Don’t give an interest-free loan to the government!”

I get that.  It’s a logical argument.  But I’m firmly in the “I enjoy getting a refund” camp, for a couple of reasons.

  1. The money that I’m getting in my refund probably wouldn’t have been invested anyway; it would have been squirreled away to my emergency fund, which is a high-interest savings account.  I’m not exactly earning lots of dollar bills on that.
  2. There is a psychological boost that comes with getting a small chunk of ‘extra’ money.  It’s a way to put a significant dent in a loan, set aside funds for a house improvement or family vacation, or replenish an emergency fund.  (We don’t spend our refunds frivolously; for someone who would be tempted to do so, a refund might not be the greatest idea.)

Here are five ways we minimized our tax bill for 2017:

  1. We contributed to tax-advantaged retirement accounts.
    • The hubby and I both contribute to 401(k)s at work.  We didn’t max them out in 2017, but we definitely contributed more than either of us ever had in the past.  (My goal is to max mine out this year!)  This money was all contributed pre-tax.
    • If you have a 401(k) at work, you can still deduct a contribution to a traditional IRA if you meet certain income limits. I wasn’t sure exactly where our modified adjusted gross income (MAGI) would land in 2017, so I waited until tax time to do the analysis.  I ended up making a partial contribution for the 2017 tax year, and funded it as I filed my taxes.  I’ll use the refund money to replenish the funds I put in the IRA.  Plus, the IRA contribution reduced our taxable income even more, leading to a bigger refund!
  2. We used FSA and HSA accounts.
    • Since I had our daughter last year I knew that I would have to pay quite a bit of out of pocket expenses against our medical plan, so I maxed out my flexible spending account (FSA) at work.  FSA contributions are free from Medicare/Social Security, federal, and state taxes!  The caveat is that FSA money is “use it or lose it” – so you have to be certain you will use up the funds in the year you contribute them (there is also a small grace period to use up FSA money the following year).
    • I don’t have a Health Savings Account (HSA) at work, but my husband does.  HSAs are used in conjunction with high deductible health plans.  This money is also pre-tax and the best thing about an HSA is that the money is portable.  You can take it with you if you leave!
  3. I contributed to a Dependent Care FSA.
    • If your employer offers it, you can fund a dependent care FSA up to $5,000 a year.  Dependent care FSA contributions are also free from Medicare/Social Security, federal, and state taxes.  When you factor in our marginal tax rates, this income would otherwise be taxed at nearly 39% – so this is a ton of tax savings.  You need every little bit when you pay as much for daycare as we do!
    • If your employer doesn’t offer a DCFSA, you may be able to claim the dependent care tax deduction.  You can’t double dip on this with the FSA, but if you have more than one child you may be able to claim costs that are above the $5,000 DCFSA limit.
  4. We itemized our deductions.
    • We used some of the common deductions – property taxes, mortgage interest, and charitable contributions – to itemize rather than take the standard deduction.  The larger the deduction, the smaller the taxable income, which means a smaller tax bill.  With the tax reform changes, 2017 is probably the last year for the foreseeable future that we’ll be able to itemize.
  5. We received the child tax credit.
    • Really there isn’t anything to do to claim this credit other than have a kid.  But there is an income limit on it, so by utilizing some of the options listed above, we reduced our MAGI enough to ensure that we got the full $1,000 credit.  The best thing is that a tax CREDIT is a dollar for dollar reduction to your tax bill.  (FYI: the income limits for the child tax credit have increased significantly for 2018 with the tax reform, so more earners with kids will be eligible for this credit.)

Do you enjoy or dread doing taxes?  What did you do in 2017 to reduce your tax liability?

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