During the holiday season your focus can easily get taken up by thoughts of gift-giving, decorating, parties and yummy food. But don’t let the month of December get away from you! Now is the time to be thinking about financial moves you need to make before the end of the year to put you in the best possible position come tax season.
Could you ramp up 401(k) or 403(b) contributions? Every dollar you contribute to these retirement plans lowers your yearly taxable income. Lower it enough, and you might be able to qualify for other tax credits or breaks available to those under certain income limits. Note that contributions to Roth 401(k)s and Roth 403(b)s are made with after-tax rather than pre-tax dollars, so contributions to those accounts won’t lower your taxable income for the year. They will certainly help to strengthen your retirement savings, however.2
Are you thinking of gifting? How about donating to a charity or some other kind of 501(c)(3) non-profit organization before 2016 ends? In most cases, these gifts are partly tax-deductible. You must itemize deductions using Schedule A to claim a deduction for a charitable gift.3
If you donate appreciated securities you have owned for at least a year, you can take a charitable deduction for their fair market value and forgo the capital gains tax hit that would result from their sale. If you pour some money into a 529 college savings plan on behalf of a child in 2016, you may be able to claim a partial state income tax deduction (depending on the state).4,5
Of course, you can also reduce the value of your taxable estate with a gift or two. The gift tax exclusion is $14,000 for both 2016 and 2017. So, as an individual, you can gift up to $14,000 to as many people as you wish this year. A married couple can gift up to $28,000 to as many people as desired in 2016 and 2017. (Unfortunately, the IRS prohibits a current-year income tax deduction for the value of a non-charitable gift.)6
Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday, and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are never taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. If you do this and change your mind, the IRS gives you until October 15 of the year after a conversion to undo it.7
Do you practice tax-loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.1
In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.1
Can you take advantage of the American Opportunity Tax Credit? The AOTC allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified college expenses. Phase-outs kick in above those MAGI levels.8
What can you do before they ring in the New Year? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.
Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women. As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.
1 – fool.com/retirement/2016/11/09/1-smart-tax-move-to-make-before-the-end-of-2016.aspx [11/9/16]
2 – nerdwallet.com/blog/investing/8-yearend-investing-dos-donts/ [12/19/15]
3 – irs.gov/taxtopics/tc506.html [10/20/16]
4 – cbsnews.com/news/tis-the-season-for-giving-back/ [11/14/16]
5 – tinyurl.com/hr964ee [11/11/16]
6 – irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes [10/31/16]
7 – forbes.com/sites/ashleaebeling/2016/02/10/richie-rich-roths-6-ways-to-snag-one/ [2/10/16]
8 – irs.gov/uac/American-Opportunity-Tax-Credit [12/8/15]