Last updated on December 1, 2017 at 02:22 pm
It’s the perfect time to consider strategic adjustments prior to year-end that can help you minimize your taxes for the calendar year 2017.
Take last minute deductions.
- During the last few weeks of the year, many nonprofit organizations that you have supported in the past will send letters asking if you would like to make a 2017 contribution, so that you can take it as a deduction for this year. This is a good option if you were going to make a donation anyway and you need the tax deduction this year. But remember, that you must have a receipt to back up any contribution, regardless of the amount. A canceled check is not enough!
- Much like the charitable contribution, a 2017 expense you can pay in advance is to your estimated state income tax bill due January 15 or a property tax bill that will be due early next year. The caveat? Watch out if you are in AMT, as your state income taxes will not be deductible.
Sell loser investments to offset gains.
This year-end tactic involves selling investments, such as stocks and mutual funds, to realize losses, which you can use to offset any taxable gains realized during the year. Losses offset gains dollar for dollar, and, if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.
Contribute the maximum to your retirement accounts.
One very effective investment is a retirement account. It can grow to a substantial sum because it compounds over time. It is tax-deferred if you are in a traditional 401(k) and tax-free if you are in a Roth 401(k).
- Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($18,000 for 2015, $24,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.
- Also consider contributing to an Individual Retirement Arrangement (IRA). The sooner you get money into the account, the sooner it has the potential to start to grow tax-deferred. Making deductible contributions also reduces your taxable income for the year. You can contribute a maximum of $5,500 to an IRA for 2015, plus an extra $1,000 if you are 50 or older.
- If you are self-employed, one of your options is to contribute to a Keogh plan. These plans must be established by December 31, but contributions may still be made until the tax filing deadline (including extensions) for your 2015 return. The amount you can contribute depends on the type of Keogh plan you choose.
About that IRA
You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 70 1/2. Failing to take out enough triggers one of the most draconian of all IRS penalties: A 50% excise 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.
When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments.
Important note: One of the advantages of Roth IRAs is that the original owner is never required to withdraw money from the accounts. The required minimum distributions apply to traditional IRAs.
Watch your flexible spending accounts.
With year-end approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2015 set-aside money as late as March 15, 2016. If not, you can make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.
While the advantage of your flexible spending accounts is money that goes into the account avoids both income and Social Security taxes, there is the “use it or lose it” rule to consider. Because you have to decide at the beginning of the year how much to contribute to the plan and, if you don’t use it all by the end of the year, you forfeit the excess, this is the time to be sure you spend it all!
Defer your income.
One final thought for good year-end planning: since income is taxed in the year it is received, perhaps you can defer some 2017 income until 2018 and at the same time you will also defer the taxes owed.
While it is difficult for anyone who is not self-employed to postpone wage and salary income you may be able to ask if you can defer a year-end bonus into next year — as long as it is standard practice in your company to pay year-end bonuses the following year.
Whether you are employed or self-employed, you can also defer income by taking capital gains in 2018 instead of in 2017.
But it only makes sense to defer income if you anticipate that you will be in the same or a lower tax bracket next year. On the other hand, if it seems likely that you will receive additional income in 2018 that might put you in a higher tax bracket, you may take a reverse approach and accelerate income into 2017 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket next year.
The bottom line is that you need to use common sense and have a reasonable assumption of what 2017 will bring so that you can make wise, educated year-end tax decisions with few unexpected consequences. Just be sure to speak with your tax adviser before making any tax decisions!
Ken Bagner is a member of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance is proud to partner with NJCPA to bring you valuable tips for about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance New Jersey.