While Congress bickers over a tax reform package, the rest of us are left to make sense of end-of-year tax planning.
Since we don’t know the outcome and reforms would most likely not take effect until 2018, focus on the things within your control today.
Maximize contributions to a 401(k) or 403(b) plan. These payroll deductions will immediately lower your taxes and put money away in a tax-deferred manner.
Contributions may be met by matching contributions from an employer. A match is free money. However, since they must run through your paycheck, contact your payroll department now.
Convert a traditional IRA to a Roth IRA. By converting to a Roth, you are moving money from a tax-deferred account to one that is tax-exempt. The younger you start, the easier it is to get started and benefit from the tax exemption.
Many investors worry they make too much money to contribute directly to a Roth IRA. However, wise investors know there are no income limits on Roth conversions. As such, analyze how much income tax you are willing to pay now to receive tax-exempt growth going forward.
Furthermore, a Roth IRA does not impose “Required Minimum Distributions” on investors who are 701/2
Although not a tax benefit, qualified retirement plans can also provide creditor protection and can be left to heirs in a tax-advantaged manner.
A Health Savings Account also delivers an immediate income tax deduction. An HSA allows you to invest money in a tax-deferred manner, allowing for long-term growth. If earnings are used for qualified health expenses, they can be withdrawn in a tax-exempt manner.
Although you must have a high-deductible health insurance policy to use an HSA, the long-term compounding of this alternate investment plan can really pay off in lowering current taxes as well as future medical expenses.
Harvest investment losses. If you sell a negative position, you realize a tax loss that can offset up to $3,000 of income for joint tax filers. However, losses can offset an unlimited amount of capital gains. Unused losses can be carried forward indefinitely.
When using tax losses, make sure not to violate the “wash-sale” rule.
Contribute to an education fund such as a 529 college savings plan or Education Savings Account. A 529 plan can receive up to $70,000 per beneficiary from one person this year. An ESA can receive up to $2,000 per year, and the earnings are tax-exempt if used for qualified education expenses.
Supercharge your charitable donations. Obviously, charities are happy to take your cash, but they will gladly accept appreciated securities also. If you gift appreciated securities, you don’t pay taxes on the deferred gain but receive the full benefit of the market value as a donation.
Those who are at least 701/2
Charitably inclined people can also transfer appreciated stock to someone in a lower income tax bracket, such as a grandchild. When the grandchild sells the stock, they will pay capital gains tax but most likely at a much lower tax rate.
Lastly, you can accelerate deductible expenses that are not due until next year. By doing so, you “bunch” deductible expenses such as property tax, mortgage interest, medical expenses or charitable expenses. Effectively, you will have large deductible expenses in one year followed by very little the next year. This allows you to better use itemized deductions one year followed by the standard deduction in the next year.
With less than one month left in the year, a little bit of planning and strategy can go a long way toward lowering your 2017 tax bill. Finally, what you earn this year does not matter. What does matter is what you earn net of taxes.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.