With the holidays kicking into full gear, you may not exactly have taxes on the brain. But actually, now's the perfect time to focus on taxes, because if you wait too long, you'll miss your chance to lower your IRS bill for the year. Here are a few critical tax moves to make before 2017 comes to a close.
1. Squeeze out a little more 401(k) savings
It's estimated that only 15% of 401(k) participants manage to contribute the maximum, and understandably so. The current annual contribution limits are $18,000 for workers under age 50 and $24,000 for those 50 and over. And most of us can't afford to part with that much cash.
But even if you can't max out for the year, it still pays to contribute as much as possible. Because 401(k) contributions are made with pre-tax dollars, the more you put in this year, the less you'll have to pay the IRS. Just how much of a difference might that mean for your taxes? Let's say you contribute $10,000 for the year, and your effective tax rate is 30%. By socking that money away, you'll shave $3,000 off your tax bill, just like that. Plus, the money you put into your 401(k) will get to grow on a tax-deferred basis, so the more you contribute, the more you stand to gain over time.
2. Unload some loser investments
It's not often that your entire portfolio is doing well. If you have a few specific investments that have been underperforming, it could pay to sell them at a loss before the end of the tax year. Not only will you free up cash to invest elsewhere, but you'll also benefit from a strategy called tax loss harvesting.
In a nutshell, any time you sell an investment for less than what you originally paid for it, you can use that loss to offset capital gains -- and thus lower or eliminate your capital gains taxes. And if your net losses for the year exceed your gains, you can apply up to $3,000 in losses to offset your taxable income. Not only that, but you can carry any remaining losses to future tax years.
Here's how that might play out. Imagine you take a $7,000 loss, and only have $3,000 in capital gains. The first $3,000 of that $7,000 will cancel out your gains, the next $3,000 will be used to offset your ordinary income for the current year, and the remaining $1,000 will be carried into 2018.
3. Give to charity
It pays to be generous toward the end of the year, because the more you contribute to qualified charities, the greater a deduction you'll get to take on your taxes. And it's not just cash donations that are tax-deductible. You can also write off the goods you donate, provided you meet certain criteria. First, you must donate those goods to a registered charity; giving them to your struggling neighbor unfortunately doesn't count. Next, you must obtain a detailed receipt listing all of the items you give away. Finally, you must be sure to deduct the fair market value of those goods, as opposed to what you paid for them originally. But as long as you stick to the rules, you'll get a pretty nice deduction for helping others.
4. Use up your FSA balance
Flexible spending accounts are a great money-saver -- provided you actually use up your balance. Many plans operate on a "use it or lose it" basis, so if you contributed, say, $1,500 to your FSA this year and have only racked up $1,200 in eligible expenses, it's time to start spending down that remaining $300. If you're due for a follow-up appointment with a specialist in January, you might try pushing it up to December so you can claim your copay against your 2017 balance. Similarly, if you'll soon need to renew a 90-day drug prescription or get new eyeglasses, it pays to do so this year so that you don't wind up forfeiting money.
5. Make an extra mortgage payment
Many of us are used to paying our mortgages each month and calling it a day. But if you're able to sneak in one extra payment before the end of the year, you stand to really benefit tax-wise. That's because the interest you pay on your mortgage is tax-deductible, so the more you pay in a given year, the greater your tax break will be. Furthermore, the IRS doesn't care whether the payments you make are scheduled or not, which means that if you get a bonus in December and apply it to your mortgage, you can take whatever associated tax break comes with it.
The tax moves you make between now and the end of the year can save you serious money on your 2017 return. As you prepare to ring in 2018, put some thought into your taxes. You'll be happier for it this coming April.
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