Though you have until mid-April of 2017 to file your 2016 taxes, now's the time to start thinking about what that return might look like. Whether you're worried about owing taxes or want to increase your refund, here are a few moves to make before 2016 comes to a close.
1. Max out your retirement plan contributions
Putting money into an IRA or 401(k) isn't just a smart retirement-planning move; it can also lower your taxes immediately. Because the money you contribute goes in pre-tax, you can lower your tax burden for the year by maxing out on the annual limits, which are as follows:
- $18,000 for an 401(k) if you're under 50
- $24,000 for a 401(k) if you're 50 or older
- $5,500 for an IRA if you're under 50
- $6,500 for an IRA if you're 50 or older
If you're self-employed and have a SEP IRA, you can contribute up to 25% of your earnings this year for a maximum of $53,000. Putting money into a retirement account could push you into a lower tax bracket for the year, so it pays to max out if you're able to do so.
2. Sell investments at a loss
Nobody likes losing money on investments, but if you have a couple of bum stocks in your portfolio, selling them for less than what you paid could help from a tax perspective. For one thing, you can use losses to offset gains from other investments. Furthermore, if your net losses for the year exceed your net gains, you can apply up to $3,000 to offset your regular income.
Say you take a $6,000 loss in 2016 and only have $2,000 in gains for the year. You can offset those gains with $2,000 in losses and still use the remaining $4,000 to your advantage. The first $3,000 can be used to offset your ordinary income for 2016, and the additional $1,000 loss can be carried forward into 2017.
3. Use up your FSA balance
Opening up a flexible spending account is a great way to lower your taxes, but if you have money left over in your account by the time your plan year is up, you'll lose out by virtue of having to forfeit your balance. To avoid this, make sure to use up your remaining funds before the end of your plan year (which, for many, coincides with the last day of the calendar year, Dec. 31). You can accomplish this by pushing up doctor visits and screening tests, and renewing prescriptions early. If you wear glasses or contact lenses, now's a good time to get a new pair or stock up on supplies. Just be sure to check with your insurance provider before moving your appointments or prescriptions up, because some plans require that you wait a minimum amount of time between services or renewals.
Keep in mind that you're also allowed to claim mileage for getting to and from health-service appointments. If you're trying to use up a balance and have a specialist you see once a year who's 50 miles away, you may want to squeeze in a visit before the year comes to a close.
4. Defer some income
If you're freelance or self-employed and are expecting a large tax bill for 2016, you might consider pushing the last of your earnings into the upcoming tax year. Doing so could be a simple matter of waiting to send out invoices or extending your typical billing terms for existing clients (which, incidentally, might also buy you some goodwill).
Now, if you're a salaried employee, you probably don't have as many options for deferring income. That said, if you're due a bonus, you might try asking your employer to defer your payment to 2017.
Keep in mind that while deferring income to the upcoming tax year can help with your 2016 taxes, doing so really only makes sense if you expect to be in the same tax bracket (or, better yet, a lower one) next year. In fact, there's a flip side to this strategy. If you have reason to believe that you'll fall into a higher tax bracket come 2017, you might try accelerating some of your income into 2016 (though it's usually easier to delay income than get paid sooner).
5. Give to charity
Many people get into the giving spirit this time of year, and the more you donate to charity, the greater a tax deduction you'll be eligible to take. Best of all, you can take this deduction even if you don't have a lot of cash to give away. If you donate property to a registered charity, you can take a deduction for the gift's fair market value. Figuring out fair market value can be tricky in some cases, though certain organizations will help you estimate what your items are worth. In any case, if you're planning to take a large deduction for donated goods, be sure to keep a detailed record of what you give away, and get an itemized receipt confirming your donation. You'll need this information on hand when you go to file your upcoming taxes.
These five moves can save you a large chunk of money on your 2016 taxes, so if you want to take advantage, act now. You don't have a lot of time before the end of the year, and missing out on any one of these strategies could wind up hurting you financially.