Log your expenses, file your receipts!It’s easy to remember major life events, such as getting married or having a baby, but it’s easy to forget about the smaller expenses that can save you money via tax deductions. At the end of the year, you’ll need receipts in hand for deductible expenses including those related to job searches, home businesses, daycare or day camp for the kids, charitable donations and medical bills.
Accelerate deductions. This means moving 2017 tax-deductible expenses to 2016. For example, consider paying your January mortgage in December. Or, prepay state and local income taxes that are due in 2017 (as long as you aren’t in a tax bracket subjected to the Internal Revenue Service’s alternative minimum tax, which doesn’t allow some tax breaks.) You won’t need to make these payments until later in the year, but budgeting for them now can help you meet these financial goals.
Defer income: If you have control over the timing of certain types of income, like bonuses, you can postpone the receipt of that income until the new tax year begins. For instance, if you are self-employed, you may want to hold off on sending some invoices until January. That way, you’ll receive payment in the new tax year and won’t have to report it on your 2016 tax bill. This strategy is especially useful if you know you’ll be in a lower tax bracket the following year. As with accelerating deductions, this often applies to end-of-year activities.
Set up a retirement plan. Business owners and self-employed professionals should consider setting up and contributing as much as possible to a qualified retirement plan so they can reap the tax savings. These are allowed for side businesses, as well. Businesses with full-time employees may add a New Comparability profit-sharing or even a Cash Balance plan to an existing 401(k), which might permit substantially larger allocations to the principals.
Max out your 401(k). It’s an ambitious goal, but employees who max out their employer-offered 401(k) plans will save, at minimum, $4,500 on their federal income tax bills, depending on the tax bracket percentage they fall under. To completely max out this account, you will need to contribute $1,500 a month. If you are 50 or older and using your catch-up contribution option, you’ll need to pay $2,000 a month. If your employer does not offer a retirement savings plan, consider opening an IRA. In 2016, retirement savers can defer income tax on up to $5,500 in IRA contributions ($6,500 for those over age 50).
Transfer assets to charity. Instead of writing a check to your favorite charity, consider donating appreciated assets, such as shares of stock. Donating the assets instead of the cash prevents your having to pay capital gains tax on the sale, which can result in considerable savings. You’ll also obtain a tax deduction for the fair market value of the property. Additionally, neither the charity nor the donor will pay a capital gain when that security is eventually sold.
Use your annual gift-tax exclusion. You may gift up to $14,000 per year (couples may gift up to $28,000) to as many individuals as you wish without having to report that gift or pay taxes on it. This includes gifts into a 529 college savings plan if you have young children or grandchildren. You can even front-load five years’ worth of contributions into the 529 plan, for a total of $70,000 (or $140,000 for couples). You can also pay somebody’s medical care or education tuition (from preschool on up to higher education) if you pay directly to the institution.
Take your required minimum distribution. If you will turn 70½ years of age in 2016, you must withdraw a required minimum distribution from your retirement accounts annually or face a 50% tax on the amounts not withdrawn. If you own multiple individual retirement accounts (IRAs) or 403(b) contracts, each is subject to a minimum distribution, but you might choose to satisfy the aggregate amount from either one or several accounts. If you are over age 70½ and still working, your employer’s retirement plan may allow you to delay distributions until you retire (as long as the account is not an IRA or you are not more than a 5-percent owner of the business).
Harvest stock/mutual fund losses. Tax-loss harvesting involves selling securities in your investment portfolio at a loss to offset capital gains. If losses exceed gains, you may offset up to $3,000 of ordinary income. Any additional losses that cannot be used in the current year are carried over into future years. A word of caution: To claim a capital loss, you must not purchase a substantially similar security 30 days before or 30 days after the trade date.
To learn more about tax-saving strategies, contact us. By working with a tax and investment professional who understands the current tax code, you can keep more of your hard-earned dollars.