Year-end is fast approaching. During the busy holiday season, you may not be thinking about ideas for reducing income taxes for 2017. However, this is exactly the time to take advantage of some potential tax-savings opportunities – before Dec. 31 has passed.
Congress is working on tax legislation to reduce the number of tax brackets, reduce the top tax rates and eliminate some itemized deductions while doubling the standard deduction. Nothing is final until the House and Senate work out their differences and the president signs the bill. Even if a new tax law is passed before Christmas, everything remains the same for 2017 taxes. Review your situation and see if any of the following ideas apply to you.
If your income pushes you into the highest tax bracket, try to delay any bonuses until next year, when the top tax bracket may be lower. Pay expenses in December that you would normally pay in January to bring itemized deductions into this year. For example, paying your January mortgage payment in December will increase your mortgage interest deduction, and paying the full year’s property tax bill before year-end will increase 2017 deductions.
Maximize IRA and retirement plan contributions. Tax law limits the amount you can contribute annually, so contribute as much as you can each year, based on your age, income and plan limits. If you turned 50, don’t forget the additional amounts you are allowed to contribute, called make-up contributions. Work with your payroll department to make up any shortfall in your withholding with your last few paychecks for the year.
Consider Roth 401(k)s and IRAs. If you have the option to contribute to a Roth 401(k) instead of a traditional 401(k), look at the long-term benefits of tax-free growth once a Roth is funded. Income limits apply to funding Roth IRAs; whereas no income limit applies to Roth 401ks.
If you have low taxable income this year, consider a Roth conversion. In the future, you may be in a higher tax bracket when you take distributions from your IRA on top other income such as Social Security income and pension income. Reducing the size of your IRA now, and paying the tax at low rates, may save taxes later.
Scour your investments held in taxable accounts for any losses to harvest. Make sure your cost-basis records are up to date, and if any investment’s value has fallen below its cost basis, sell the investment to create a capital loss that offsets any capital gains you have. You can reinvest immediately in a similar investment to stay in the market. If you plan on selling an investment with a gain, consider putting this off until next year. Reducing investment income will also reduce the additional 3.8 percent investment taxes assessed to higher income taxpayers.
Be charitable and reduce your tax liability. Work with your CPA to find out how much you could give to charity in lieu of Uncle Sam. You can contribute to your own donor-advised fund or make outright gifts to charities. Donate appreciated investments instead of selling the investment, claiming a capital gain and then giving cash.
If you participate in a qualified health insurance plan, max out your health savings account contributions before year end. If you have flexible saving plans that require you spend funds this year, look for medical costs you can pay for this year.
Ensuring you are taking advantage of all opportunities to reduce your income taxes is a worthwhile exercise. No one likes to pay more taxes than absolutely necessary, and just think: Whatever you save can be spent on something fun!