It’s That Time of the Year Again
March 7, 2017
It’s that time of year again – tax time. In between recovering from Mardi Gras and celebrating St. Patrick’s, it is a good time to shake your head clear and compile those tax documents. You may think there’s not much left you can do to manage what you might owe for 2016, but after fully reviewing your documents and activities for the year you might still find a savings or two. While we don’t know how tax rules might change in 2017, here are our top tax planning ideas that you can use now and most likely going forward.
- Retirement savings, retirement savings!
The very best tax deduction is the one that helps you personally too! Everyone qualifies for at least one tax-deductible retirement savings account. By maximizing your contributions to retirement, you are saving for the future while also reducing your taxable income for your next filing. If you have a qualified retirement plan at work (like a 401k, 403b, or others), employers will often match part of your contributions and sometimes even make a profit sharing contribution too. These employer contributions can act like a huge immediate return on your investment each year. Your own contributions come right off your income and reduce your taxes paid throughout the year. If you don’t have a qualified plan at work or are self-employed, there are other IRA options that also offer tax deductions. All these accounts have contribution limits that you want to review carefully. If you do have a qualified plan with your employer, your outside IRA contribution is not tax-deductible, but it still might make sense for you. Your IRA investments grow tax deferred and still may offer you a tax benefit down the road. For any IRA, you have until tax filing date, April 18th this year, to make your IRA contribution and still get a tax benefit. So you still have time to benefit!
- Consider Other Deductible Savings
Another way to reduce your taxable income is by contributing to flexible savings accounts at work for medical expenses or child care. Money that you put into these accounts also goes in pre-tax, reducing your reported taxable wages. Later, when you need the money in these accounts for qualified expenses, the withdrawals are completely tax-free. Depending on what state you live in, a 529 educational savings plan can be a way to save for your child’s college education while reducing your state income taxes. Over 30 states and the District of Columbia now offer a credit on your state income taxes for contributions to your state’s own plan.
- Charitable donations
Donations are a great way to give back to the organizations and causes close to your heart while also reducing your taxable income. Donations of cash or investments may even help lower your estate. If you donate appreciated securities you can deduct the full market value of the security and you also avoid paying capital gains taxes on any accumulated gains. You can also deduct goods donated as long as you keep the correct records. Although you can’t write off the time you’ve given to an organization, mileage and purchases made for it are deductible. Be sure to have the charity give you a receipt for anything you plan to deduct, because the IRS requires full documentation in order for you take charitable deductions.
- Manage Your Investment Gains and Income
Another source of potential tax management can be found in your investment portfolio. Dividends, interest income and capital gains/losses are all part of your annual tax calculations. To help minimize taxable dividend and interest income, emphasize these investments in your IRAs and other tax-deferred accounts. Your annual gains on appreciated securities that are sold fall into two categories. Those owned less than a year are short-term gains and are taxed as your ordinary income tax rate. Investments that are held longer than a year are taxed at a lower capital gains rate. You can save substantial taxes by keeping track of how long a security has been held. If you bought the security at different times, you can even specify which purchase date you want counted in the sale to further minimize your capital gains tax.
We don’t know how tax laws still might change this year, but it is always best to start managing your taxes early in the year and throughout. These are just a few strategies that are likely to benefit you even with potential changes to the tax code. This year, more than ever, check in with your professional advisors often and early for the best strategies in your circumstances.