Just as we’re all letting our thanksgiving turkey digest and watching football, guess what?? Its nearly December!! Time sure does fly, right? Having a three-year-old boy, I notice this phenomenon now more than ever.
I know with everything going on this time of year with parties, family gatherings, holiday shopping, etc. its probably not top of mind, but this is the time of year to think about any year end tax planning strategies that may help lower your tax bill for this year and possibly the next. Another reason to think about this is the fact that there are some potential tax changes on the horizon as the GOP is looking at tax reforms that are getting closer to a floor vote. While its a little too soon to say exactly what that will look like (we have some idea and the vote is getting closer), and who will win and who will lose, all we can plan for is what we know, so let’s look at some typical strategies that you can explore with what we know today.
1. Get serious about your retirement savings! - One great way to lower your taxable income for the year is to contribute to a retirement plan, such as:
a. Your company 401(k) - bump up your last contributions for the year, and make sure you’re maximizing any company match – its free money!!
b. 403(b) – just like a 401(k), make sure your maximizing your contributions and/or employer match!
c. Traditional IRA – Make a contribution if your eligible for deductible contributions – you have until tax filing deadline the following year, but why wait??
d. SIMPLE/SEP IRA/Solo 401(k) – Typically used with small business owners – Start a plan if you don’t have one already and keep more of what you make, and give less to Uncle Sam!
You have until the end of the year to make contributions to your company plans and until tax filing deadline the following year for IRA’s and some other plans.
2. Be Charitable – as you’re thinking about your holiday shopping lists, think about gifts to charities as well! Not only are donations needed, they can also reduce your tax bill if you itemize deductions. In addition to monetary donations, household goods and clothing counts too. Many charities geared towards families can certainly use clothing, toys, diapers etc.
3. Harvest tax losses – if you have assets in your non-qualified portfolio that have lost value, they can be a valuable tax tool. Realized capital losses can be used to offset realized capital gains. If you have realized losses exceeding realized gains, you can use up to $3000 to reduce your ordinary income. Anything exceeding $3000 can be carried forward to future years. Remember not to violate the wash sale rule if you go down this path. Also, don’t necessarily let possible tax savings cause you to make an investment decision that is contrary to investment goals.
4. Review your medical costs – Hopefully you’ve kept track of your unreimbursed medical expenses for the year. If they exceed 10% of your Adjusted Gross Income (under age 65) then you may be eligible to deduct those.
5. Review your FSA and HSA – If you have a workplace FSA, or are eligible for an HSA, don’t ignore these going into the end of the year. Just like your retirement accounts, money going into these accounts are pretax. The one caveat to this is in regard to your FSA as you could lose it. Some plans allow for a grace period in the next year to use these funds, but not all. Additionally, some plans allow for a carryover of up to $500 into the next plan year, but not all. Be sure to check with your employer so you understand your plan provisions.
6. Pay your mortgage – Because under current rules, mortgage interest is deductible in the year its paid if you itemize, consider paying your January payment in December.
7. College costs – for those with kids in college, the spring semester bill likely isn’t due until January, but you may consider paying before the end of the year. If you do this, you may be able to claim the American Opportunity Tax Credit or the Lifetime Learning Credit on the current year’s return. There are considerations when utilizing these, so get familiar with them as it relates to your situation.
8. 529 College Savings Plans State Deductions – Saving for kid’s college? Consider a 529 College Savings Plan. While contributing to a 529 doesn’t offer a Federal Tax Deduction, some states do offer a state tax deduction for contributions. Oregon is one of those!
9. Miscellaneous Itemized Deductions count too! - take a look at any miscellaneous itemized deductions you may claim in 2017 as anything of 2% of your AGI is deductible. This can include any fees paid to a financial advisor for investment management expenses. If it appears you may be close to reaching the 2% mark and anticipate needing additional items that may qualify, you may want to consider purchasing those before year end. Publication 529 at https://www.irs.gov/publications/p529 covers what items fall into this category.
Bonus Time! - Roth Conversions – This one isn’t so much of a tax savings in the current year as much as it is a potential smart tax savings move for the future. If your income in 2017 is considerably lower for whatever reason than you expect in future years, you may want to consider converting some or all of your traditional IRA to a ROTH IRA. Because ROTH IRA’s, if certain rules are met, are eligible to be distributed tax free, by converting your Traditional IRA to a ROTH IRA and realizing the tax in the current year, you may set yourself up to have a more tax efficient account later in retirement. Similarly, if the government announced tax rate increases in the future, a conversion in the current year could save income tax later. There are many specific rules and considerations to be aware of, so you may want to consider talking to a financial professional or tax professional before taking action on this.
Hopefully this gives you something else, besides a turkey leg to chew on. Does any of this bring up any additional questions? Things you hadn’t considered? Consider it an opportunity to reach out as I’m here to help!
Do you want to bring a new level of attention to your financial decisions? Reach out to me at email@example.com or schedule a free consultation here.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation.