Below are some tips that can still save you money for 2016
1. Sell investments showing a loss 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 2016 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
2. Contribute the maximum to retirement accounts
There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes.
Company-sponsored 401(k) plans may be the best deal because employers often match contributions.
Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed ($18,000 for 2016, $24,000 if you are age 50 or over). If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.
Also consider contributing to an IRA. You have until April 15, 2017 to make IRA contributions for 2016, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred. Making deductible contributions also reduces your taxable income for the year. You can contribute a maximum of $5,500 to an IRA for 2016, plus an extra $1,000 if you are 50 or older.
3. Check the balance in your flexible spending accounts
Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees steer 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 2016 set-aside money as late as March 15, 2017. 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.
4. Avoid the kiddie tax
The “kiddie tax” rules were created to prevent families from shifting the tax bill on investment income from Mom and Dad’s high tax bracket to the child’s low bracket. For 2016, with the kiddie tax, a child’s investment income above $2,100 is 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 percent on the gain, rather than the zero percent rate that is applicable for most children.
5. Check IRA minimum 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 percent 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.