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5 Financial Moves to Make Before the End of the Tax Year

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During the holiday season, we want to enjoy the festive atmosphere and spend time with family and friends. We don’t want to be reminded of the possible tax bill that may be lurking around the corner of year’s end.

We don’t like to think about paying for our holiday splurging in February, when we may need to fork over additional taxes. However, there are some things you can do before year’s end to lower your taxes and perhaps gain a fresh perspective for the New Year.

Financial Moves to Make During Every Tax Season

1. Max Out 401k Contributions

For tax year 2017 (filing in 2018), the maximum contribution to a 401k retirement plan is $18,000 for individuals under age 50. Individuals 50 and older have a “catch-up” provision, and can contribute an extra $6,000, for a total of $24,000 annually. By making voluntary contributions to a 401K plan, you are reducing your taxable income, so the more you can contribute, the more you lower your tax bill.

These rules also apply to the 403(b), most 457 plans, and the government’s Thrift Savings Plan. If you need to adjust your contributions, contact your company’s HR representative and ask if you can contribute more. If you haven’t already maxed out your contributions, one strategy for year end (if it won’t create a hardship for you) is to ask if you can deposit your entire final paycheck into your 401k.

Since 401k contributions are made with pretax dollars, no extra IRS form needs to be filed. Your contributions are reported in Box 12 (code D) of your W-2. Since your 401K contributions are made with pretax dollars, you are taxed on the distributions once you begin taking withdrawals.

An added bonus for voluntary contributions to a retirement plan is that you may qualify for the Retirement Savings Contribution Credit, commonly called the Saver’s Credit. The credit is 10%, 20%, or 50% of your contribution, depending on your income. The credit phases out completely if your income is over the following amounts in 2017:

  • Head of Household: $46,500
  • Married Filing Jointly: $62,000
  • All other filing statuses: $31,000

401k plan magnifying glass

2. Max Out IRA Contributions

The maximum contribution for 2017 to a Roth or Traditional IRA for those under age 50 is $5,500. For those aged 50 and over, there is a “catch-up” provision of $1,000, for a maximum contribution of $6,500. If you’re able, contribute as much as you can to your IRA before this year’s tax deadline. You can make contributions to your IRA until the filing deadline in April 2018 and still use it as a deduction on your 2017 taxes, assuming you qualify.

Unfortunately, not everyone qualifies to contribute the maximum to a Roth IRA, and some high earners aren’t allowed to contribute at all. There are phase-out ranges that depend on your filing status and income. For 2017, these ranges are as follows:

  • Single or Head of Household: $118,000 – $133,000
  • Married Filing Jointly: $186,000 – $196,000
  • Married Filing Separately: $0 – $10,000

If you’re married and filing jointly and you have an adjusted gross income (AGI) above $196,000, you aren’t allowed to contribute to a Roth IRA. Meanwhile, if you’re single and earn less than $118,000 in a year, you can contribute up to the limit of $5,500 if you’re under 50, and $6,500 if you’re 50 or older. The IRS announces the rules governing income limitations, and they can change from year to year. Double check to make sure you are not planning to make a contribution that is not allowed.

ira file calculator

For deductions on contributions to Traditional IRAs, there are phase-out ranges as well. If you are covered by a retirement plan at work, the phase-out ranges are as follows:

  • Single or Head of Household: $62,000 – $72,000
  • Married Filing Jointly or Qualifying Widow(er): $99,000 – $119,000
  • Married Filing Separately: $0 – $10,000

If you are married and filing jointly, have a retirement plan at work, and have an AGI above $119,000, you are not allowed a deduction for a Traditional IRA contribution. If you file as single or head of household and have a retirement plan at work, you are not allowed a deduction for a Traditional IRA contribution if your AGI is above $72,000.

If you and your spouse (if married) are not covered by a retirement plan at work, and file as single or head of household, your AGI is irrelevant and you can deduct the full amount of your contribution. If you file as married filing jointly and your spouse is covered by a retirement plan at work, your AGI must be less than $186,000 to deduct your full contribution. The deduction is phased out for AGI over $196,000.

If you file as married filing separately, and your spouse is covered by a retirement plan at work, you can deduct a partial contribution if your income is less than $10,000, but are allowed no deduction if your income is $10,000 or more.

Excess Contributions
The contribution amount of $5,500 (or $6,500 if you are 50 or older) is the maximum amount that may be contributed to all IRAs (Traditional or Roth) in a given year. If you contribute more than the maximum, you will be subject to a 6% penalty on the contributions and any earnings. This penalty is figured on Form 5329. You pay the penalty for each year the excess is in the account. To avoid this penalty, remove the excess before you file your return.

Basis in a Traditional IRA
If you contribute to a Traditional IRA, but your deduction is limited because of the phase-out ranges, the amount in excess of the allowed deduction is considered “basis” in your account and made by after-tax dollars. When you take distributions, the basis portion of the distribution is not taxable.

Tracking basis is your responsibility. This is done on Form 8606, Nondeductible IRAs. If you do not keep track of your basis, all of your distribution is taxable, and you are paying tax a second time on the basis amount of the distribution. Being taxed once is bad enough. Remember to track your basis.

3. Cut Your Losses

If you have stocks or mutual funds in your portfolio whose price has declined below your basis, consider selling them before the end of the year. If you’re able to sell enough, those losses may offset the gains of your stocks that have increased in value, and you can deduct the difference on your tax return.

Keep in mind, however, that it’s not a free pass for all losses. Individuals are limited to $3,000 per year, or $1,500 for people married and filing separately. Any amount in excess of $3,000 may be carried forward and applied in future years. Generally speaking, the gain or loss is determined as of the sale date, not the settlement date, which may be several days later (and if you sell on December 31, even in the next year).

To generate qualified losses, you must sell on or before December 31, but don’t sell too hastily. Try to set up an appointment with your stock advisor before the New Year, and figure out which stocks were truly duds and which ones are worth keeping.

To report stock transactions, you must file Form 8949 and Form 1040, Schedule D.

stock market charts crash

4. Make Charitable Contributions

If you contribute to a qualified charitable organization, usually 100% of your contribution is tax deductible as an itemized deduction on Schedule A. Just be certain that you get your charitable contributions in before December 31, as there’s no grace period moving into the next year. You must also make certain to get receipts for what you donate, as you must itemize everything on your return.

Keep in mind the documentation requirements are as follows:

  • Less than $250 donation: canceled check, credit card statement, receipt, or bank statement
  • Gift of $250 or more: you need a contemporaneous, written acknowledgment
  • Gift of $75 or more and you get something for it: you need written disclosure, and can only deduct the difference between what you gave and what you received
  • Donation of vehicle: see IRS Publication 4303

Keep in mind that while giving to a family in need over the holidays may be a wonderful thing to do, a private family most likely isn’t a qualified nonprofit, and they won’t be able to give you a receipt to use for itemized deductions.

However, if you opt to give to your church (assuming your church is nonprofit) or donate household goods to the Salvation Army, those moves are always tax-deductible. If you have any questions about a particular organization, the IRS has a database of tax-exempt organizations, which may be a handy tool if you don’t already have a charity of choice.

When you deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. Remember, most charitable organizations are 50% organizations; that means you can deduct contributions to those organizations up to 50% of your Adjusted Gross Income (AGI). Any amount in excess of that can be carried forward up to five years.

one hundred dollar bill

5. Gather Your Tax Documents Now

Employers need to send copies of 1099s and W-2s by January 31, so you won’t have those handy immediately, but that doesn’t mean you can’t get started planning. Whenever you have time, start gathering your prior years’ tax payments, and any items that you may need for credits and deductions. If you’re not certain what you may need, there’s no time like the present for a little research.

Some of the more popular tax credits include the following:

Here are some of the more popular tax deductions:

Expand your horizons with these articles on credits and commonly overlooked itemized deductions.

If you start gathering your tax-related documents now, you will have an easier time in February and March when you are preparing your returns. And you’ll feel way more relaxed when you complete your taxes well before the filing deadline. Once you set up a routine, who knows, you might even begin to look forward to filing your tax return early.

Final Word

If you are stressed and anxious every tax-filing season, perhaps the reason is that you are not well prepared. You’ve heard the saying that two inevitabilities in life are “death and taxes.” Since you know tax returns must be filed every April, why not get a head start on the inevitable? Start early, organize and prepare, and set yourself up for a stress-free tax day when others are hectically scrambling to beat the deadline.

What ways do you know of to ensure your New Year finances get off to a good start?

Gary Tuttle
Gary's extensive professional background varies from small business owner to school administrator. Most recently, he has been involved in taxes, first as a certified preparer, and later as a tax software developer. He is currently licensed to practice before the IRS, volunteers as an instructor for AARP's Tax-Aide program, and has his own tax practice.

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