The end of the year is often hectic, which is why it’s important to take some time now to reduce your tax bill. Our firm can offer additional strategies to further mitigate your tax burden; however, the following 5 tips are an excellent starting point:
- Defer income. Because income is taxed in the year it is received, it may be beneficial to postpone income to lower your tax obligation. For example, ask your employer to postpone your annual bonus to pay in 2018, or if self-employed, bill your clients after the end of the year.
- Look at last-minute tax deductions. Accelerating deductions can help lower your income. Charitable contributions are one way to do this…just be sure that you have a receipt. You may also be able to take advantage of additional deductions if you plan to itemize instead of claiming the standard deduction.
- Use loss harvesting to offset investment gains. This is an important year-end strategy for taxpayers who have low-performing investments, such as stocks and mutual funds that they can sell at a loss. Losses can be used to offset taxable gains dollar-for-dollar. If your losses are more than your gains, you can use up to $3,000 of excess loss to reduce your total taxable income, and any other losses can be carried over year-after-year for your lifetime.
- Maximize your retirement contributions. Using tax-deferred retirement accounts such as 401(k)s and IRAs to reduce your taxable income is win-win. You can both reduce your taxable income and increase your retirement nest egg. If you are employed and have a company-sponsored 401(k) plan with matching contributions, it’s advised to contribute the maximum ($18,000 for 2017 for those up to age 49 or $24,000 for those age 50 and over). If you can’t afford the maximum, be sure to contribute enough to qualify for your employer’s matching contributions.
- Focus on your Flexible Spending Account (FSA). An FSA allows you to use tax-sheltered funds to pay for childcare and medical bills and can help save tax dollars—but only if you use the funds by the end of the year. So, be sure to review your FSA balance so you can make a plan for last-minute qualifying expenses. You may also want to see if your employer is offering the IRS- approved grace period, which allows you to spend 2017 FSA funds through March 15, 2018.
The tips above offer a few ways to save significant money by putting a tax plan in place before the end of the year. You can also schedule an appointment with our firm to develop a customized tax strategy and perhaps reap additional savings.