6 Smart Tax-Planning Moves to Make by the End of the Year
Unless you’re the most dedicated accountant ever, no one enjoys tax season each spring. But, since income taxes are unavoidable, planning ahead is the best way to make the process tolerable. If you take the time for these year-end planning steps now, your tax filing process can be much simpler and smoother next April.
As we said, taxes are unavoidable. However, a large part of tax planning revolves around reducing your taxable income. Less taxable income equals lower taxes, but many strategies must be implemented in the year ahead of each tax season.
Adjust your portfolio. No one is saying that you should make investment decisions based solely upon taxes (which might be a bad idea). But if you’ve already considered selling certain appreciated assets, it makes sense to do so at the end of a year in which your overall income is lower than usual. On the other hand, selling when you’re earning in a higher tax bracket could mean an additional tax burden. So this is an issue to plan carefully with your tax professional.
Max out retirement plan contributions. Certain types of retirement plan contributions are tax deductible, so know your limits and try to reach them before the end of the year. This also applies to business owners who utilize certain types of retirement plans for their employees or themselves.
Consider an IRA rollover. If your income has declined this year and you’re eyeing retirement, it’s time to investigate your IRA rollover options. For some people, it makes sense to convert some traditional IRA funds to a Roth account, and take a one-time tax hit in exchange for tax-free income in the future. But the only way to know the best route for you is to consult with a skilled tax professional.
Donate to charity. Donations to qualified charities are deductible on your income tax return, but you have to make all donations before the end of the year. You also need to keep proof of these donations; a receipt will suffice, or you can use your credit card statements.
Gift securities wisely. Depending upon your tax bracket, you could owe considerable taxes when you sell securities. However, you can gift them to someone in the 10 or 15 percent tax bracket, who then will not owe long-term capital gains taxes on the investment (adult children or elderly parents, for example). This is a complicated maneuver, however, so we caution you not to attempt it without consulting a professional.
Send invoices late in the year. If you’re self-employed and have enjoyed a good year, you can reduce taxable income a bit by sending December’s invoices late in the month. Payments that arrive on or after January 1 won’t be counted as income until next year.
These are just a few of many potential opportunities to reduce income tax liability for 2017. But remember, plan all complicated tax maneuvers only after seeking advice from a skilled tax professional.