December 12, 2017
Now is the time to focus on year-end tax planning. Careful and strategic planning can help minimize your tax bill and maximize what you keep. Given the uncertainty and sweeping scope of proposed tax law changes, planning is both more complex and more important than ever this year. Below, we discuss five year-end tax planning strategies you can use to maximize how much of your own money you keep.
Play the Timing Game
Why pay taxes now if you can delay it until next year? Income deferral is difficult for W-2 employees, but the self-employed and freelancers have a lot more room to plan. Businesses and the self-employed who operate on cash basis accounting (as opposed to accrual basis) can delay invoicing customers and clients until late December. For cash basis taxpayers, your income is taxable only if you receive it before year end, so delaying invoicing means you won’t get paid until early January.
Remember that you want only to defer income if your tax bracket next year will be the same or lower. If you know you will be in a higher tax bracket next year, then you might want to do the opposite and move as much income into 2017 as possible. Unfortunately, with the proposed tax bracket changes, this might be a difficult planning decision as both the current and new rules, if any, will likely impact your decision.
Speed Up Deductions
Similar to deferring income, you might want to accelerate deductions.
Any deductions where you impact the timing – such as charitable deductions – are good choices. Remember to keep proper records to document the contributions regardless of the amount. Also, consider donating stocks or property that has appreciated in value in lieu of cash to receive a higher tax benefit.
Other deductions that are good options to pull into 2017 include estimated state income taxes due January 15 and property taxes due early next year.
There are two important points to keep in mind. First, pulling deductions into 2017 can be a big mistake if you are impacted by the alternative minimum tax. Second, if a new tax bill passes and eliminates some or all of the itemized deductions, then this might be your last chance to benefit by accelerating them into 2017.
Harvesting Isn’t Just For Farmers
The stock markets are up big so far this year, so a lot of people have gains instead of losses. However, certain sectors, such as commodities, haven’t done so well. If a portion of your investment portfolio is down from where you purchased, you might want to harvest those losses to offset gains from other investments and reduce your taxable income.
The general rule is that you can deduct losses up to the amount of your capital gains, plus an additional $3,000 – and then roll over any excess losses to be used in future years. However “wash-sale” rules prevent you from harvesting losses on a security then re-acquiring substantially identical security within 30 days before or after the sale. Just make sure your tax strategy aligns with your overall investment goals.
Take Your Retirement to the Max
Maxing out your 401(k) contributions can help you avoid significant taxes. If you have the financial means, see if you can contribute extra before year end. Self-employed individual 401(k) owners can make their “employer” contributions up until April 17, 2018. Another option is to contribute to an IRA; however, this isn’t as time sensitive. You can contribute to an IRA all the way up to the initial tax filing deadline and still deduct the amount against 2017 income.
Make Tax Planning Less Taxing
The cost of hiring a tax professional to assist you in navigating the complexities and challenges of tax planning is also something you can write off if you itemize your deductions. Again, like many other itemized deductions, this one could disappear under the proposed tax plans – so now’s the time to invest in consulting an expert.