The end of the year is a time to reflect, celebrate the holidays and plan for next year. In the process, don’t forget to review your tax situation. You still have time to lower your tax bill, and there are many options to consider.
It is always wise to consult with a qualified tax or financial adviser in conjunction with any tax moves. With that in mind, here are some year-end tax tips.
1. Make charitable contributions
For taxpayers who itemize deductions, charitable contributions made before Dec. 31 can reduce taxes. “Just make sure to save your receipts,” said Chicago-based financial adviser Jason Kirsch of Marcum Financial Services.
Note that there are limits on the dollar amount of donations that can be deducted annually. Also make sure the charity of your choice is qualified to receive tax-deductible charitable contributions under IRS rules.
If you’re looking to donate before year-end, search out charities in your state that offer tax credits as opposed to just a tax deduction, said Clint Haynes, a Kansas City, Missouri, financial planner and president of NextGen Wealth in Lee’s Summit, Missouri. “Don’t worry, you’ll still get your tax deduction,” he said. “But there are a number of charities that will offer you a 50 percent tax credit as well.”
A tax credit has more impact than a deduction. A credit will reduce your tax burden dollar for dollar, whereas a deduction simply reduces your adjusted gross income. “In my state of Missouri, charities that offer tax credits include Neighborhood Assistance Programs, food pantries, domestic violence shelters (and) children’s shelters,” Haynes said. He suggested you do an internet search for charities in your own state.
2. Consolidate medical expenses
If your medical and dental expenses add up to more than 10 percent of your household’s adjusted gross income, you might be able to deduct them from income, depending on your age. You can learn more at the IRS website.
To help get you over the 10 percent threshold, it can make sense to prepay medical expenses this year that might not be invoiced until 2017.
Related: 30 Tax Mistakes the Rich Never Make
3. Take advantage of small-business tax breaks
Consult a certified public accountant to see if you can take advantage of the tax provisions in the Protecting Americans from Tax Hikes (PATH) Act of 2015 and the Consolidated Appropriations Act of 2016.
Some provisions include:
- Enhanced expensing elections
- A 15-year write-off for qualified leasehold and retail improvements
- The use of research credits against other taxes
- Bonus first-year depreciation changes
4. Prepay your property tax bill
Review your property tax bill to determine if bundling your property taxes makes sense for 2016. By paying your 2017 property bill before the end of 2016, you can deduct the amount this year. This especially can make sense if you made more money in 2016 than usual.
Related: 28 Ways to Prevent a Tax Audit
5. Establish a small-business retirement plan
If you own a small business and would like to set up a 401(k) plan for your employees, establish your qualified plan on or before Dec. 15 to ensure the plan is in place before the Dec. 31 deadline, said Rosa Ybarra, senior financial planner with Tranquility Financial Planning in McAllen, Texas.
For employer contributions, you can generally make contributions for the current tax year right up to your company’s tax-filing date. This may or may not include any extensions. It’s best to consult your tax adviser.
Employee contributions need to be made by the end of the year. Again, it’s wise to consult a knowledgeable tax or financial adviser.
6. Use tax-loss harvesting
Tax-loss harvesting involves realizing losses on investments held in taxable accounts. These losses can be used to offset gains on other investments. Any losses in excess of $3,000 over the amount of your gains can be carried over and deducted in subsequent years.
Note that losses can be used not only to offset gains from the actual sales of investments, but also from gains due to capital gains from mutual funds and ETFs. The ordering rules regarding offsetting long-term gains and losses can be a bit complex, so it’s wise to consult with your financial or tax adviser.
Related: 10 Commonly Missed Tax Deductions
7. Maximize 401(k) contributions
The end of the year is usually the time that companies give out bonuses. That makes it the perfect time to maximize your 401(k) contributions, said David G. Niggel, founder and president of Key Wealth Partners in Lancaster, Pennsylvania.
The maximum amount you can contribute in 2016 is $18,000. If you are 50 or older, you can make an additional “catch up” contribution of $6,000, for a grand total of $24,000. Contributions can cut your federal tax bill because the contributions are deducted before taxes are calculated.
“If you are sure that a bonus is on its way, go see your 401(k) plan administrator to make an additional contribution to your account,” Niggel said. “This contribution will grow tax-deferred and result in a bigger retirement nest egg.”
Even if you’re not in line for a bonus, it’s a good idea to maximize your 2016 contributions prior to the end of the year. That way, you’ll receive the maximum tax benefit in this area.