The latter part of 2017 has been filled with discussions and votes regarding new tax legislation. But, with nothing official in the books yet, taxpayers would be wise to focus their year-end tax planning around the current laws, since the proposed legislation may not become law or may undergo significant changes before being passed. Below are seven key tax strategies that could improve your finances and reduce your tax bill regardless of what Congress decides.
- Max out contributions to tax-sheltered savings
Whether it’s a 401(k), health savings account (HSA), IRA or Roth IRA, make sure you are contributing the max amount. In 2017, HSA contributions for a single person are limited to $3,400, and $6,750 for families; IRA’s cap out at $5,500 in annual contributions ($6,500 for those 50 or older).You can contribute up to $18,000 in 401(k)’s annually, but only 10% reached that max in 2016 according to data. For all of these accounts, if you’re contributing pre-tax funds, it may feel like less money in your wallet now, but it will mean a lower tax bill come April.
- Review your withholding
Examining the amounts that are withheld from your paycheck could help you avoid a larger tax bill in the spring. There are several categories of individuals who often find they are not withholding enough: those with a second job, those who owe estimated taxes (and potentially missed a payment), those who started Social Security or pension payments, and those who sold large assets with gains.
The IRS website includes a withholding calculator to assist taxpayers in determining if their withholding amount is correct. If it is incorrect, you still have time to adjust by updating your form W-4 with your employer.
- Meet your medical deduction threshold
Only around 6% of filers claim the deduction for medical expenses, which may be why it is under threat of repeal if the new tax legislation is passed. Current law allows medical expenses in excess of 10% of your adjusted gross income to be deducted.
Because this saving can be a vital tax benefit, if you’re close to meeting the threshold, find ways to accelerate your medical spending before the year ends. This could include purchasing vital medical equipment or scheduling procedures and appointments before December 31.
- Take advantage of taxable losses and gains
If your investments took a hit this year, you are able to deduct the losses up to the amount of capital gains, plus $3,000. You are even able to roll over an excess of losses to claims for future years if your losses exceeded the annual limit.
For those currently in the two lowest income tax brackets (10% and 15%), you might be eligible for a zero tax rate on investments with long-term capital gains. One way to achieve this zero-tax capital gain is by selling a low-cost-basis long-term investment. You could then purchase it back at a higher cost basis and potentially lower your future taxes as long as that acquisition does not push you into a higher tax bracket.
- Give to charity
Increasing your charitable contributions is always a smart, and generous, way to lower your spring tax bill. Rather than simply donating money though, you can also donate highly appreciated stock by simply transferring ownership of your stock to the charity. If you’re eligible for a deduction, it will be based on the market price of the donated stock and you will not owe capital taxes on its appreciation.
Another viable option is placing money or investments in a donor-advised fund, which allows you to spread out donations to charities in future years and allows you to take an itemized deduction for the amount transferred into the account this year. If you’re 70 ½ or older, you may also donate to a charity through your IRA, which would reduce the taxes on your required withdrawals.
- Take any required distributions
As mentioned, once you reach 70 ½, most qualified accounts (401(k)’s, IRA’s, etc.) have required minimum withdrawals (RMD) and that money is taxed as ordinary income. Although there is a grace period until April 1st of the following year for those taking their first RMD, every other year’s RMD must be taken by December 31st of that year.
If you don’t take the RMD in time, you will still owe the required taxes you would have paid plus a cost penalty, which is half of the amount you were supposed to withdraw. Many financial institutions have RMD calculators to help you determine the amount you should be withdrawing.
- Take tax planning deductions
One highly beneficial tax deduction is for investment advice and tax planning. This deduction may be modified under the new proposals, but the current law still allows taxpayers to make deductions for items such as the cost of tax software like TurboTax or fees paid to financial planners or accountants, so make sure to take advantage whether you do your own taxes or generally seek help.
Although the 2018 tax code is still uncertain at this point, there are changes you can make in the next few weeks to alter your spring tax bill. This time of year is undoubtedly busy with the holidays and gatherings, but you will be thankful come April of next year that you took the time now and made some beneficial tax moves for your future.