No one wants to have their holiday parties and presents tainted with the thought of tax season before the snow has even melted. However, one of the best New Year’s resolutions you can make is to stay one step ahead of the financial game in the coming year. Thankfully, there are several things you can do to help lower your tax bill and ease your money concerns.
Max Out 401k Contributions
In the 2016 tax year (filing in 2017), the maximum contribution for a 401k retirement plan is set at $18,000. Individuals 50 and older can contribute an extra $6,000, for a total of $24,000 annually. Keep in mind that 401k contributions are made with pre-tax dollars, so the more you can throw at your fund, the more you can reduce your taxable income.
These rules apply to the traditional 401k, 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 and it won’t create a hardship for you, it never hurts to ask if you can deposit your entire final paycheck in your 401k.
Since 401k contributions are made with pre-tax dollars, no IRS form needs to be filed. You are taxed on the money you put into your 401k once you begin taking withdrawals.
Max Out IRA Contributions
The current maximum contribution for a Roth or traditional IRA for those 49 and under is $5,500. The maximum for those 50 and over is $6,500. If you’re able, contribute as much as you can to your IRA before this year’s tax deadline. Thankfully, you have some extra time to contribute, so rather than having to squeeze every penny in by December 31, you can contribute until tax day next year.
Unfortunately, not everyone qualifies to contribute the maximum to a Roth IRA, and some high earners aren’t allowed to contribute at all. For example, if you’re married and filing jointly and you have an adjusted gross income (AGI) higher than $194,000, you aren’t allowed to contribute to a Roth IRA. Meanwhile, if you’re single and earn less than $117,000 in a year, you can contribute up to the limit of $5,500 if you’re under 50, and $6,500 if you’re over 50. The rules governing annual contributions are generated by the IRS and they can change from year to year, so make certain you aren’t counting on making a contribution that’s not allowed.
There are likewise AGI limits regarding the deductibility of contributions to a traditional IRA. If you are covered by a retirement plan at work, are married and filing jointly, and have an AGI of $98,000 or less, you can deduct your entire contribution (up to the contribution limit). If you file as single or head of household and also have a retirement plan at work, your AGI must be less than $61,000 to deduct your entire contribution. If you aren’t 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, your AGI must be less than $183,000 to deduct your full contribution.
Cut Your Losses
If you have stocks in your portfolio that end up suffering losses this year, consider selling them. If you’re able to sell enough, those losses may offset what you might owe on your taxable investments where you had gains, 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.
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 losses, you must file Form 1040, Schedule D.
Make Charitable Contributions
If you contribute money to a qualified non-profit organization, 100% of your donation is tax deductible. You just have to make certain that you get your charitable contributions in before December 31, as there’s no grace period moving into 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 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 non-profit, and they won’t be able to give you a receipt to be used for itemized deductions. However, if you opt to give to your church (assuming your church is non-profit) or to donate your car 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 that 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.
Start Gathering Your Documents for Taxes Now
Most employers begin sending important tax documents such as 1099s and W-2s in the New Year, 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:
- Earned Income Tax Credit (EITC)
- Child Tax Credit
- Credit for Child and Dependent Care
- Education Credits
- Saver’s Credit
- Energy-Saving Tax Credits
Here are some of the more popular tax deductions:
- Home Office
- Gains from the Sale of Your Home
- Student Loan Interest
- Teacher’s Educational Expenses
- Medical and Dental Expenses
- Home Mortgage Interest
- Casualty, Disaster and Theft Losses
If you start gathering relevant documents now, you’re certain to have less hassle in February and March, when you’re working on your returns, and you’re also sure to be thankful you did the work ahead of time.
If tax season manages to stress you out every year, chances are you just haven’t properly prepared. The old saying about “death and taxes” really is true. Since there’s no way to avoid that inevitable deadline, why not get ahead of the 8-ball this year, and work your way toward a stress-free tax day?
What ways do you know of to ensure your New Year finances get off to a good start?
(photo credit: Mr Moss)