- Now is the time to boost your retirement contributions, harvest losses and make charitable donations so you can lower your tax bill or increase the refund on your return come April.
- These year-end tax moves will ensure you're taking advantage of all of the tax breaks you can get.
When it comes to tax reform, the future is uncertain. However, there are still tax moves you can make now that are a sure thing.
Year-end tax planning may be even more vital this year — before many provisions change under the pending Tax Cuts and Jobs Act. So before 2017 is over, make sure you're taking advantage of all of the tax breaks you can get.
Here are five strategies:
For most investors, 2017 was a great year — which can come with hefty tax consequences. That makes this a good time to consider selling any losing investments to generate a tax deduction and cushion the blow.
You can use those losses to zero out capital gains, and then deduct up to $3,000 a year against ordinary income. Losses in excess of that can be carried forward to future tax years until the balance is used up.
For just that reason, tax-loss harvesting is a popular tool for maximizing after-tax returns, most commonly in the fourth quarter of the year, when investors aim to lower their tax liability. (But this trick only works on taxable accounts, not your 401(k) or IRA.)
As for those retirement accounts, there are many advantages to boosting contributions before the end of the year, and the tax savings is an important one.
"If you contribute to your 401(k), you lower your taxable income," said Lisa Greene-Lewis, a CPA and tax expert at TurboTax.
If you are 18 or older, you can contribute up to $18,000, and if you are over 50 you can make an extra $6,000 catch-up contribution. With IRAs you can contribute $5,500, and if you are over 50, an additional $1,000. (You have until the April deadline to make IRA contributions.)
(If you contribute to a Roth 401(k) or Roth IRA, you won't get a tax break this year, but your money can grow tax free and generally be withdrawn tax free in retirement.)
To support your favorite cause this year — and have a meaningful effect on your taxes — you may also want to front-load your charitable giving this month.
While the deduction for charitable contributions is one of the few protected in the Republican tax bill, fewer taxpayers would likely use it. That's because the standard deduction would nearly double, meaning fewer households would itemize — which is the only way to take advantage of the deduction for charitable contributions.
There are a few tricks, too, when it comes to the tax benefits of giving assets to charity, like avoiding capital gains taxes on investments by giving stocks or other items that have grown in value. High-income earners, in particular, should consider a noncash donation specifically because of the tax advantages, according to John Voltaggio, managing director at Northern Trust.
For example, if you have shares of Coca-Cola stock (which is up around 10 percent year to date) and donate it, you don't have to pay taxes on the gain. But you will typically still get credit for the deduction equal to the current fair market value.
Voltaggio recommends accelerating your donations to get the current tax benefit or using a donor-advised fund. That allows you to make a charitable contribution and receive an immediate tax break, and then recommend grants from the fund to your favorite charities over time.
Check what's left in your flexible spending account so you can spend that money before the end of the year. (Some employers offer a short grace period or rollover, but FSA funds are typically "use it or lose it.")
You can put those tax-free dollars toward new glasses, filling prescriptions or dental care that isn't covered by insurance, like a replacing a filling, said Kathy Pickering, executive director of The Tax Institute at H&R Block.
While you are looking at your medical expenses, add them up, Pickering said. You may have incurred enough to hit the medical expense threshold — which is 10 percent of your adjusted gross income, but could fall to 7.5 percent under proposed tax reforms. You can deduct everything you spend over that threshold (but you can't double dip and count expenses paid for with tax-advantaged FSA or health savings account dollars).
Miscellaneous expenses, such as job hunting, work-related travel, unreimbursed employee expenses, union dues, hobby expenses and — yes — tax prep, add up but they can also be deducted if they exceed 2 percent of your adjusted gross income. Just make sure to document all of the expenses you have for this year.
Tax reform provisions would eliminate most of those deductions in 2018 and beyond.
These may seem small, but they are not insignificant. For example, according to IRS records, an estimated 20.6 million taxpayers claimed tax preparation fees in 2015 alone, for a total of more than $7.9 billion.
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