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Seriously: 'Tis the season to think about tax strategies

Before you get wrapped up in the upcoming string of holidays and the inevitable bustle that goes with it, financial advisors recommend dedicating some time to taxes. And no, they're not trying to be funny.

The fact is this: If you want to reduce your 2016 tax bill, most of the available strategies must be deployed before the calendar flips to 2017.

"Unfortunately, too many people try to do tax planning after the calendar year is over, when they're preparing their tax returns," said certified financial planner Kevin Meehan, a regional president for Wealth Enhancement Group. "But there just aren't a lot of choices at that point."

While Meehan and other advisors say tax planning should be a year-round process if you want to maximize your strategies, there are some end-of-the-year things you can do to reduce what you owe Uncle Sam next spring.

An H&R Block tax preparer assists customers in Des Plaines, Illinois
Getty Images

Your retirement accounts are a good place to begin. For starters, advisors recommend maxing out contributions to them. Not only can putting more money into tax-advantaged retirement accounts reduce your tax bill right now, it will help your future become more financially secure.

"Sometimes people contribute only up to their employer match," said CFP Kevin Reardon, owner and president of Shakespeare Wealth Management. "But if you can go higher, you should."

The 2016 contribution limit for 401(k) plans is $18,000 for workers age 49 and younger and $24,000 if you're 50 or older. Because contributions come out of your paycheck before taxes, they lower your taxable income.

Individual retirement accounts have different rules. The 2016 limit for contributions across your IRAs, whether Roth or traditional, is $5,500 for workers age 49 or younger and $6,500 for those 50 and older.

Keep in mind that Roth contributions are not deductible but are tax-free upon withdrawal. Also, you can only put money in a Roth if you meet income limits.

Unfortunately, too many people try to do tax planning after the calendar year is over, when they're preparing their tax returns. But there just aren't a lot of choices at that point.
Kevin Meehan
regional president at Wealth Enhancement Group

For traditional IRA contributions, a full deduction generally only goes to people who either are not covered by a workplace plan or whose adjusted gross income is $61,000 or less ($98,000 or less if you file a joint tax return). A partial deduction goes to higher incomes, but phases out quickly.

The good news for procrastinators is that IRA contributions come with one of the few extended tax deadlines: typically, April 15 of the following year.

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Meanwhile, if you are in retirement, the money you take out of your accounts should be front and center.

First and foremost, if you are age 70½ or older, you must start taking an annual required minimum distribution, or RMD, from your 401(k) or IRA. The exact amount is based on the account balance and your life expectancy. (Roth IRAs come with no RMD until the account owner's death.)

The penalty for failing to take the required minimum is steep: 50 percent of the amount you were supposed to withdraw. There is one exception to the rule, and it pertains to newbies. In the first calendar year that you are supposed to take the RMD, you can delay it up to April 1 of the next year. But that won't get you out of the RMD for that year or any after that.

"Think of it as a water spigot: When it's turned on, it stays on," said Greg Gardner, a CFP and president of The Gardner Group. "And you will pay taxes on it."

Gardner said about half of his firm's clients are now facing the RMD. In fact, 2016 is the year that the baby boomer generation's oldest members — an estimated 2.5 million people — turn 70.

For those who haven't yet reached that milestone but are at least age 59½ (when you can tap an IRA or 401(k) without paying a penalty), advisors say it's worth evaluating whether taking distributions now makes sense as a long-term strategy.

This is because some IRA and 401(k) balances end up growing so large that the RMD causes people to fall into a higher tax bracket.

If that's a possibility, it might make sense to "squeeze money out of your IRA a little bit at a time for a long time," Gardner said.

Tax-loss harvesting time?

Also take a look at whether your state gives a tax deduction for contributions to 529 college savings plans. Depending on your situation, this might be a worthwhile way to reduce your tax burden, while putting money toward your child's education.

Tax-loss harvesting is another useful tool. In simple terms, this involves using an investment loss to offset a taxable capital gain.

Say you own a taxable mutual fund that shows a $5,000 loss on your original investment. If you sell your interest in the fund — known as "harvesting" the loss — you can use that amount to lower any capital gains you've realized on other investments and owe taxes on.

If your gains are lower than your losses, you can claim up to $3,000 of the loss on your tax return. Remaining losses can be carried forward to use against future capital gains.

Charitable donations also come with a deduction as long as they don't exceed more than 50 percent of your adjusted gross income (in some cases, a limit of 20 percent to 30 percent applies).

If you're charitably inclined but are unsure where you want to direct your giving, a donor-advised fund is an option.

"It's basically a savings account for charitable giving," explained Meehan of Wealth Enhancement. "You contribute to it now and make the decision at some point in the future about what charity you'll donate to."

Any contribution you make to the fund is treated as a charitable donation in the year you make the contribution, and the assets grow tax-free. The minimum amount required to set one up depends on the company that administers the fund, but it typically ranges from $5,000 to $25,000.

And, of course, advisors stress that while it still isn't too late to tend to these tax-related items, starting earlier next year will help you in the long run.

Basically, said Meehan, "the sooner you get started on tax planning in the calendar year you're preparing for, the more advantage you can take of strategies earlier in the year."

— By Sarah O'Brien, special to CNBC.com

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