The end of the calendar year offers a unique moment to save money on your taxes. Depending on your financial situation, you can take steps before January 1st and possibly reduce the taxes you’ll owe.
Anticipate Your Income
End of year tax planning is not magic. It revolves around shifting the timing of when certain tax events occur. As a general principle, the more money you make, the higher your marginal federal income tax rate. So if you’re making more money in 2017 than you’ll make in 2018, finding a way to shift some income from the 2017 to 2018 tax year can sometimes reduce your overall tax bill for 2017.
But if you anticipate making more money in 2018 than 2017, then you probably don’t want to shift some of your 2017 income to 2018, as this could bump you into a higher tax bracket for the 2018 tax year. Therefore, it becomes important to try and predict your 2018 income so you can have the best 2017 tax strategy.
Calculate Your Itemized Deductions
When filing your tax returns, you can choose between a standard deduction and itemized deductions. If you’re in a situation where your itemized deductions for 2017 won’t exceed the standard deduction, you will take the standard deduction. Does that mean your itemized deductions from 2017 will go to waste? Not necessarily. It may be possible to delay some of the 2017 tax deductions to the 2018 tax year.
For example, let’s say you’re considering when to make a charitable donation that’s tax deductible and you can make it in 2017 or 2018. If you don’t have enough itemized deductions in 2017, even with the charitable donation, might want to make the donation in 2018 instead of 2017.
Another thing to be aware of is that certain tax deductions (such as the payment of some medical bills) can’t be claimed until they reach a certain amount, usually a certain percentage of your income. If you can’t hit this threshold in 2017 and you can delay when you initiate this tax deductible event (such as scheduling a surgery), it might make financial sense to take this tax deduction in 2018 instead of 2017.
Max Out Your Retirement Plan Contributions
A variety of retirement plans have tax deductible contributions. Some of these include:
- 401(k)
- Traditional IRA
- 403(b)
If you haven’t met the tax deduction limits for these retirement accounts for the 2017 tax year, consider making an additional payment or two to your eligible retirement accounts. If you don’t make the tax deductible contributions into these retirement accounts when you have the chance, they can be lost for good.
Harvest Losses from Securities
Losses from securities are tax deductible up to about $3,000 each year. So if it’s almost December 31st and you have a particular stock that has lost you money, consider selling it so you can use the loss on that sale to offset any capital gains you might also have during the same tax year.
But before you go on a selling frenzy, don’t let your desire to reduce your taxes force you into an ill-advised investing decision. The last thing you want to do is sell a stock at a loss when it ends up rebounding right after you sell it.
Next, understand that once you sell the security, you can’t quickly buy it back after taking the tax benefit. This “wash rule” will undo the tax benefit you received if you buy a “substantially identical” security within 30 days after selling it.
Consider Professional Advice
These tips have been simplified and there are plenty of exceptions. As a result, it’s strongly recommended you meet with your tax professional who can examine your specific financial situation and determine what strategies are best for you.