No one likes to pay income taxes, and with New Year's Eve fast approaching, you might be hunting for tax-savvy moves that you can still make. Donating to charity is one of the best tax-lowering strategies available to you, but donating isn't the only way to tame your taxes. Here are three other tax strategies to consider before the clock strikes midnight on Dec. 31.
1. Contribute your final paycheck
If you still have a pay period prior to the end of the year, talk to your manager about stashing that last check in your 401(k) or 403(b) plan.
In 2016, participants in employer-sponsored plans like these can contribute up to $18,000 in pre-tax income, plus an additional $6,000 if they're over 50. On average, Americans contribute about 8% of their income to 401(k) and 403(b) plans, so it's unlikely they've hit those levels. If that's the case for you too, then shifting your last check to your workplace retirement plan could save you hundreds of dollars, or more, depending on your income and marginal tax rate.
If you're self-employed, this is also a good time to set up an SEP IRA plan. In 2016, 25% of your pre-tax earnings, up to $53,000, can be contributed to a SEP IRA. You can contribute to a SEP plan up until the day you file your taxes, but now is a good time to get the ball rolling so that you have plenty of time to determine how much you can contribute for this year.
Also, if you're self-employed, it might be wise to hold off on sending invoices or receiving payments from customers until 2017. Since it's close to the end of this year, deferring any income until January could make sense, if it doesn't hamstring your budget.
2. Pay the piper...early
If you pay property taxes, or you have tax-deductible mortgage interest, then pulling forward a payment from 2017 into 2016 could be smart.
To get the tax break on property taxes and mortgage interest, you need to itemize deductions on Form 1040, rather than take the standard deduction. However, in states with high property taxes, the tax savings associated with itemizing can be substantial.
Mortgage interest can be deducted on both your primary home and a second home, and you can deduct mortgage interest on home-improvement and home-equity loans, too.
Pulling forward deductible interest can be particularly valuable if you expect that your marginal tax rate will drop in 2017, either because of tax reform in Congress, retirement, or a career change. That said, pulling forward property taxes and mortgage interest into 2016 could increase your tax bill next year, unless you remember to do the same thing again next December.
If you carry credit card balances at high interest rates, and you have room on an equity line, transferring those balances to the equity line now can allow you to benefit from a full year of deductible interest on that debt in 2017 too.
3. Managing losses
We may be long-term investors, but there are times when we sell winning stocks to rebalance our portfolios, and those capital gains can cause your tax bill to increase.
If capital gains will increase your taxes this year, don't forget to mine your investments for losses that you can use to offset those gains. Losses can offset gains dollar-for-dollar, and up to $3,000 in losses can be used to reduce your income. If your loss is bigger than that, don't worry, because you can carry over leftover losses to offset future gains and income.
Short-term losses will offset short-term gains first, and long-term losses are deducted first against long-term gains, so make sure you pay attention to what types of gain and loss you're dealing with before clicking the sell button.
Remember, don't sell a great, disruptive company at a loss simply for the tax benefit. You can't buy back an investment you've sold for 30 days without triggering a wash sale that eliminates this tax-saving strategy.