posted in: Tax Tips Blog | 0

Whether you are having a good year, rebounding from recent losses, or still struggling to get off the ground, you may be still able to save on your taxes if you make the right moves before the end of the year by taking advantage of the tips below.  Not all actions may apply in your particular situation, but you or a family member can likely benefit from many of them.

  1. Maximize your 401(k) contributions

If you are a participant in a traditional employer-sponsored defined contribution plan, the 2017 contribution limit for a 401(k) is $18,000, with an additional $6,000 catch-up allowed for individuals 50 and older. Consider contributing from a year-end bonus to take advantage of the maximum contribution. Beginning in 2018, the contribution limit is set to increase to $18,500. The catch-up contribution remains the same at $6,000.

  1. Contribute to an IRA

If your employer does not offer a retirement plan, consider a traditional or Roth IRA. The 2017
contribution limit on IRAs is $5,500, with an additional $1,000 catchup for taxpayers 50 and older. With a traditional IRA, you can likely deduct your contributions, though your deduction may be limited if your spouse participates in an employer-sponsored plan.

  1. Give appreciated stock as a charitable contribution

The value of your donation is the fair market value of the stock on the date of the contribution, and you will not have to pay any tax on the appreciation of the stock. This will also prevent the gain from being
subject to the 3.8% tax on net investment income.

  1. Sell loser investments to offset gains

A key year-end strategy is called “loss harvesting”—selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.

And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income.

If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2017 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.

  1. Avoid the kiddie tax

Congress created the “kiddie tax” rules to prevent families from shifting the tax bill on investment income from Mom and Dad’s high tax bracket to junior’s low bracket.

  • For 2017, a child’s investment income above $2,100 will be taxed at the parents’ rate and applies until a child turns 19.
  • If the child is a full-time student who provides less than half of his or her support, the tax applies until the year the child turns age 24.

So be careful if you plan to give a child stock to sell to pay college expenses. If the gain is too large and the child’s unearned income exceeds $2,100, you’ll end up paying tax at 15% on the gain, rather than the zero percent rate that is applicable for most children.

  1. Check IRA distributions

You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 70 ½. Failing to take out enough triggers one of the most draconian of all IRS penalties:

  • A 50% excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year.
  • After that, annual withdrawals must be made by December 31 to avoid the penalty.

When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments.

Important note: One of the advantages of Roth IRAs is that the original owner is never required to withdraw money from the accounts. The required minimum distributions apply to traditional IRAs.

  1. Watch your flexible spending accounts

Flexible spending accounts also called flex plans, are fringe benefits which many companies offer that let employees put away part of their pay into a special account which can then be tapped to pay childcare or medical bills.

The advantage is that money that goes into the account avoids both income and Social Security taxes. The catch is the notorious “use it or lose it” rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don’t use it all by the end of the year, you forfeit the excess.

With year-end approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing employees to spend 2017 set-aside money as late as March 15, 2018. If not, you can do what employees have always done and make a last-minute trip to the drug store, dentist or optometrist to use up the funds in your account.

  1. Consider making charitable contributions directly from your IRA

If you are 70½ or older, consider making charitable contributions (up to $100,000) directly from your IRA, referred to as Qualified Charitable Distributions (QCD). While these contributions will not be deductible on Schedule A as itemized deductions, they will not be included in your adjusted gross income either but will go towards satisfying your RMD. They may also have the added benefit of not being taxable in your state of residence.