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It’s that time again to examine the moves you need to make to increase your net income and save on your tax bill. For 2017, it’s even more important to look at this now because of the proposed major changes which are currently being debated in congress for 2018.
It’s more confusing to try to make any year-end adjustments to income and deductions this year because of the potential changes that the reform bill being debated in congress right now has created. Although it’s tempting to take action based on any expected changes to the law, use some caution. Until the tax laws actually change, it may be difficult to plan exactly what can benefit you the most right now.
Taxpayers shouldn’t make a lot rash decisions based on a bill which may or may not become law. However, there are some smart money moves that can help hedge against potential changes. So, here are my 17 tax tips to reduce the amount of federal income tax you’ll pay for 2017.
Year End Tax Moves
1. Take a look at last year’s tax return for 2016
See if there’s any opportunities you may have missed, erred on, or can carry over for 2017. If you made a mistake, it’s not too late to amend your return. Double check your W-4 forms (or your quarterly tax payments if self-employed) to adjust any withholding so your regular paychecks give you the right amount of income.
2. Avoid any taxes on a RMD with a charitable donation
Seniors who have a traditional 401(k) or IRA account must take a required minimum distribution each year once they reach age 70½. Those who don’t need this money for living expenses may want to consider having it sent directly to a charity as a qualified charitable distribution. If you take it out as a qualified charitable distribution, it doesn’t increase your adjusted gross income and can also hold down the amount of Social Security that is taxed. You must do an RMD distribution from an IRA plan (minimums are a must for people 70½ years old) by year’s end or suffer a tax penalty of up to 50% of the amount!
3. Make charitable donations
You also may want to consider donating money planned for charities for next year before December 31st since that deduction may be eliminated with the tax revision plan. Charitable donations such as cash, stocks, bonds, clothing, furniture, appliances, and food need to be made before year end to be deducted from your 2017 income. If you’re looking to make an additional donation, please consider my Holiday Virtual Food Drive to benefit the Franklin Food Bank.
4. Make sure you are maxing out your retirement plan contributions
This includes maxing out 401(k) or any approved plan, even IRA CD’s before the tax deadline. Yes, you do have until April 15th to do this one, but remember that the sooner you do it, the sooner your money starts to grow, so don’t wait until the last minute. If you’re under age 50, you may contribute up to $5,500 for 2017 and if you’re over 50, it’s $6,500 that may be deducted from your gross income. Tax deductible contributions to a traditional 401(k) are capped at $18,000 for 2017.
5. Use your FSA (Flexible Spending Account)
If you have an FSA through your employer, make sure you are using it all (up to $2,600 is allowed) before year end or you may lose any remainder. While some companies provide a grace period for purchases made in the New Year, others end reimbursements at the close of the calendar year. If it’s time to get a new pair of glasses or something like that, do it before December 31st! Don’t confuse FSA’s with HSA’s (Health Spending Account)…HSA’s roll over to the next year. Taxpayers with a qualified high-deductible family health insurance plan can deduct up to $6,750 in contributions to an HSA. Those 55 or older are eligible for an additional $1,000 catch-up contribution.
6. Defer income and bonuses
Some workers might want to consider asking their bosses to wait until after the New Year to send any bonus checks. If tax rates drop for some under tax reform, some people may be better off delaying income until 2018 when it might be taxed at a lower rate. An example would be a year-end commission or bonus which may be deferred by a few days to save.
7. Start college savings
If you’re a parent or a grandparent, you can set up a 529 Plan (College Tuition Savings Plan) before the end of the year which goes toward paying college costs when you need them. While the contributions are federally taxed, many states offer a tax deduction and the earnings grow tax free. Check details online or consult a financial advisor right away. Or consider a Roth IRA for your dual college and retirement savings if you’re starting early, as Mr. Jumpstart suggests in this post.
8. Gifts to family members
It is the time of the year for giving gifts! This year you may gift up to $14,000 to any individual you’d like (or $28,000 to a tax-filing couple) and although it’s not a tax deduction, it will save the receivers any tax on that gift. This may save future estate taxes by gifting money now rather than passing it on as an inheritance later.
9. Plan to file your taxes online
It’s really very easy with clear instructions and explanations to guide you along. Spend a little time now researching the different sites and you may be able to skip the accountant or other tax preparation professional. You may be eligible to use Free File based on income (adjusted gross income for the household must be under $64,000), but everyone can save in comparison to an accountant since in most cases the online fees are only $10-$25. Plan to e-file and have any refund deposited directly into your bank account. It’s easy and the site will walk you through each entry. Personally, I like TaxACT as I’ve used it the past few years. Of course if you have a particularly complex financial situation, you may benefit from the advice of a tax professional.
10. Hold off on mutual fund purchases
People should be wary of buying mutual funds at this time of year if they will be held in a taxable account. You could get hit with a tax bill for year-end dividends even if you just purchased shares. To avoid paying those additional taxes, consult with a broker before making any purchase to find out when distributions are made.
11. Convert money from a traditional to a Roth IRA
Withdrawals from traditional IRAs are taxed in retirement, but distributions from Roth IRAs are tax-free. Money can be converted from a traditional to a Roth account prior to retirement, but taxes must be paid on the converted amount.
Tax experts say people should be careful that the amount they convert doesn’t bump them into the next tax bracket. The one exception might be those who expect to pay the alternative minimum tax (AMT) for 2017. The top AMT tax bracket is 28 percent, but it is targeted for elimination in the tax reform bill. If that happens, people paying the AMT this year could find themselves in a higher tax bracket next year. As a result, some people may be better off converting a greater amount in 2017. If you were considering a Roth conversion and you’re in the AMT, do it this year. (FYI, it’s free to convert.)
12. Harvest your capital losses
If you own stocks that have lost money, you can sell them and deduct up to $3,000 on your federal taxes. Just be careful not to violate the wash sale rule, which would disallow the deduction. This rule states you cannot purchase the same or a substantially similar stock within 30 days before or after its sale.
13. Take your capital gains
The end of the year is also a good time for some people to sell stocks that have appreciated significantly in value. If you are in the 10% or 15% bracket, the long-term gains tax rate is zero. Sell them in the 15% tax bracket and buy the stock back the next day to reset the basis. By resetting the basis, taxpayers can minimize the amount of tax they could pay on any future gains.
14. Bunch your itemized deductions into 2017
Taxpayers who itemize deductions for 2017 may not need to do it in 2018 if the standard deduction is doubled as is proposed in the new tax bill. Because of that, it may just pay in maximizing itemized deductions this year. You may want to prepay your January mortgage payment in December, make additional charitable donations, or pull the trigger on big purchases before the end of the year, like buying a car this year if you are deducting the sales tax. Sales tax deductions may be eliminated in 2018.
15. Pay state income tax in advance
Another major change that is in the new tax proposal concerns state income taxes. Both the House and the Senate bills eliminate the state income tax deduction and if that passes, taxpayers won’t be able to deduct any payments made in 2018, even if they are for the 2017 tax year. If you think you will owe state income tax in April, send in that money this December.
16. Maximize your medical deductions
Even though they may not be deductible with tax revision, this year they still are and if you have any medical bills, prescriptions, or other medical costs, you may save if you move the expense into 2017 instead and deduct it from your taxes. Check to see if any movement, such as moving up an elective surgery, will allow you to meet the deduction threshold (10%) of your adjusted gross income…it may save you hundreds of dollars.
17. Prepay mortgage interest and real estate taxes
If tax revision eliminates one or both of these for 2018, you can save some extra this year if you pay some of this in advance by December 31st. Real estate tax bills are usually due by February 1st, so you can pay the first quarter in advance and deduct it this year. The same is true for mortgage interest. If you can afford to do so, it will save you some money if you are one who itemizes.
And one more thing
When it comes to tax returns, I am appalled when I hear that people have a smile on their face because they get a large refund check from the government each year. This simply means they have overpaid their taxes through their paycheck on a regular basis. The goal of your tax bill should be to pay what you are required to pay and no more. In my world, that means planning ahead on your income and deductions so that you owe no additional taxes and receive little to no refund at tax time. In reality, a refund check is your own money given back to you with no interest because you’ve loaned the government your money all year for free. Does that make any sense?
I know some people have highly unpredictable incomes and would rather cover their bases, but for the majority of us, there’s no good reason to get a large tax refund when you could be getting that money in each paycheck all year long!
There’s only three weeks to go until we ring in 2018. If you want to minimize your 2017 federal income taxes, the time to act is right now. Are you ready to get started with these year end tax moves?