Though 2016 may be coming to a close, it's not too late to do some last-minute tax planning. Here are a few tax breaks that could shield more of your money from the Internal Revenue Service this year.
1. Retirement plan contributions
Saving independently for retirement can help ensure that you don't run out of money during your senior years. But there are also tax benefits to saving, so if you've yet to max out your retirement plan contributions for 2016, now's the time to ramp up. The money you put into a 401(k) or traditional IRA goes in on a pre-tax basis, which means every dollar you put in this year is a dollar you won't pay taxes on. If you're under 50, you can contribute up to $18,000 in 2016 to a 401(k) and $5,500 to an IRA. If you're 50 or older, you're allowed to put up to $24,000 into a 401(k) and $6,500 into an IRA. But don't wait to increase that 401(k) contribution -- it might take your company a couple of weeks to process your payroll adjustment, so be sure to put in that request right away if you want it to count for this year.
2. Flexible spending benefits
If you used up all of the money in your flexible spending account (FSA) for the year, generally speaking, you can't add more until the following year. But many plans allow participants to make changes for qualifying life events, so if you got married this year or had a baby after you made your initial election, you may be eligible to put more money into your FSA. And since FSA dollars go in on a pre-tax basis, the more you contribute, the more you stand to save on taxes. If you're going to add more money to your FSA, just make sure you have enough time and eligible expenses to deplete your balance by the end of your plan year; otherwise you risk forfeiting the remainder.
3. Charitable contributions
Many of us get into the giving spirit around the holidays, so if you're feeling particularly charitable this time of year, it can work to your advantage tax-wise. As long as you itemize deductions on your taxes, you can write off contributions to registered charities you support. All you need to do is retain proof of your donation. If you don't have money to give, you can also donate clothing or household goods you no longer need and still take a deduction. Just be sure to get an itemized receipt documenting your donation.
4. Unloading losses to offset gains
If you have investments like stocks or bonds that performed poorly this year, selling them could give you a break on your 2016 taxes. It's a concept known as tax loss harvesting, and it allows you to use your losses to offset investment gains for the year. Not only that, but if your net losses exceed your gains, you can claim up to $3,000 on your taxes against your non-investment income. In fact, you're actually allowed to carry net losses to future tax years, so if you took a big hit in 2016 and came away more than $3,000 in the hole, you might get a tax break not just this year but also down the line.
5. Paying college costs early
While you may not technically need to pay your 2017 tuition bills just yet, doing so in 2016 could result in a tax break if you're eligible for the American Opportunity Tax Credit. Though there are income limits and other restrictions, if you qualify for the credit, you might see up to $2,500 back on your 2016 taxes. Plus, 40% of the credit is refundable, which means you might actually get a check for up to $1,000 if the credit reduces your tax liability to below $0.
With 2016 rapidly winding down, now's your last chance to lower your taxes for the current year. A few smart moves in the coming weeks could put a fair chunk of money back in your pocket when the time comes to file your 2016 taxes.