The end of the year is approaching and between visiting friends and family and celebrating the holidays, your taxes may be the last thing on your mind.
However, putting off tax preparation until later could be a costly mistake. While tax season doesn't start until mid-January, if you want to affect the return you file in 2017, you'll need to make some tax moves before the end of 2016.
You might make this a yearly tradition – while there may be slight alterations in the rules or numbers from one year to the next, many of the fundamentals behind tax-saving advice remain the same.
Sell losing investments and offset capital gains or income. Do you have property, stocks or other investments that have dropped in value and you're considering offloading? If you sell the investments before the end of the year, you can use the lost value to offset capital gains (profits from capital assets). Excess losses can offset up to $3,000 from ordinary taxable income and be rolled over to following years.
Optimize your charitable contributions. Many people make an annual tradition of donating their time and money to support charitable causes. It's a noble thing to do and could come with a tax benefit. The value of your donation to a qualified charitable organization, minus the value of anything you receive in return, could offset your taxable income.
Charitable contributions are deductible if you itemize deductions. However, most taxpayers find it best to take the standard deduction – $12,600 for married people filing jointly, $9,300 for heads of households and $6,300 for single or married people filing separately for the 2016 tax year. If it's best for you to take the standard deduction for 2016 but you think you may itemize your deductions next year, consider holding off until the new year to make the donations.
Defer your income to next year. You might be able to lower your taxable income for 2016 by delaying some of your pay until after the New Year. Employees could ask their employer to send a holiday bonus or December's commission in January. It could be easier for contractors and the self-employed to defer their income since for them, it's as simple as waiting to send an invoice.
Don't let FSA savings go to waste. Employer-sponsored Flexible Spending Accounts (FSA) let employees contribute pre-tax money into their FSA accounts, meaning you don't have to pay income tax on the money. FSA funds can be spent on qualified medical and dental procedures, such as prescription medications, bandages or crutches and deductible or copays.
FSA funds that you don't use by the end of the year could get forfeited. However, employers can give employees a two-and-a-half month grace period or allow employees to roll over up to $500 per year. Check with your employer to see if it offers one of these exemptions, and make a plan to use your remaining FSA funds before they disappear.
What can wait until after January 1? Procrastinators will be pleased to hear that there are tax moves you can make after the start of the new year.
You have until the tax return filing deadline, April 18 in 2017, to make 2016-tax-year contributions to a traditional IRA. The money you add could offset your income, and you'll be saving for retirement – a double win.
The maximum contribution you can make is $5,500 ($6,500 if you're 50 or older) for the 2016 tax year. However, the deductible amount depends on your income and eligibility for an employer-sponsored retirement plan.
Bottom line. Don't wait for the tax season to start to take stock of your situation and get your finances in order. While there are a few tax moves that can wait, what you do between now and the end of the year could have a significant impact on your return.