If it’s not the kids, the spouse or the to-do lists that make you regret becoming an adult—surely tax season has you second-guessing the whole growing up bit.
Whether this tax year is looking up for you or you are more than ready to start anew, you may still have time to turn your mood around and save a bundle on your taxes. April 15, no doubt, is one of the most important tax days of the year. December 29, however, is another date to remember. It’s the last business day of 2017, and it’s the deadline to reduce what you owe on taxes, thus improving your return. Who knows, maybe a vacation isn’t that far out of reach after all?
How does knowing that tax planning is a year-round gig make taxes a less daunting feat? Although it may be true that tax strategies take time and effort to be fully effective, they do work—and prove to be very rewarding. Here are a few steps you can take before the end of the year to lower your 2017 tax bill.
Defer your income.
Income is taxed in the year it is received. The strategy you’ll want to remember though is: Why pay tax today if you can pay it tomorrow instead? If you work as an employee, it may be beyond your control to postpone wage and salary income. You may, however, be able to defer a year-end bonus into next year. Whether you are employed or self-employed, you can also defer income by taking capital gains in 2018 instead of in 2017. Of course, by using this method you will want to be fairly certain that you will be in the same or a lower tax bracket next year. If not, you could be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket.
Last-minute tax deductions.
Just as you might want to defer income into next year, you may want to accelerate deductions this year. There are various ways to do this, and all will lower your tax bill. Contributing to charity is one way to get a deduction. You can boost the tax benefits of the donation by contributing appreciated stock or property rather than cash. If you have owned the asset for more than one year, your tax benefit is doubled. Avoid paying capital gains tax on the built-up appreciation by deducting the property’s market value on the date of the gift. Charitable deductions are limited to 50 percent of your adjusted gross income.
Loss harvesting is when you sell investments, such as stocks and mutual funds, to realize losses. Afterward, you can use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar. If your losses outweigh your gains, you can use up to $3,000 of excess loss to wipe out your gains. If you have more than $3,000 in excess loss, it can be carried over to the next year. You can carry over losses year after year, as long as you do taxes.
Often, employers match contributions with company-sponsored 401(k) plans. Your goal is to try to increase your 401(k) contributions so that you are putting in the maximum amount of money allowed. If you cannot contribute that much money at once, try to contribute at least the amount that will be matched by employer contributions. If you are self-employed, the retirement plan of choice is a Keogh plan. These plans must be established by December 31. Contributions may still be made until the tax filing deadline for your 2017 return.
Check IRA distributions.
By April 1, following the year you turn 70.5 years old, you must start making regular minimum distributions from your traditional IRA. Failing to take enough out leads to consequence, including a 50 percent excise or “sin tax” on the amount you should have withdrawn based on your age, your life expectancy and the amount in the account at the beginning of the year. After that, annual withdrawals must be made by December 31 to avoid the penalty.
A flex spending account is a benefit plan that allows employees to determine an amount to be set aside from each paycheck for uses such as child care or medical bills. This money avoids both income and Social Security taxes. On the other hand, you decide at the beginning of the year how much money to contribute, so if you don’t use it all by the end of the year, you lose the money.
Sources: turbotax.intuit.com, fidelity.com