Many people don't start thinking about their taxes until April, but the smartest time to do tax planning is before the tax year ends on Dec. 31. There are many valuable tax strategies you can use to reduce your tax bill, but many of them are available only through the end of the year. Here you'll find 10 of the most popular tax moves you can make to keep a bit more of your money away from the IRS.
1. Make additional contributions to your 401(k) or employer retirement plan.
Money that you contribute to an employer-sponsored retirement plan like a 401(k), 403(b), or similar arrangement gets excluded from your taxable income. That results in a lower tax bill, and you can often also get matching contributions from your employer on what you put into your retirement account. Making additional contributions is as easy as talking to your HR department and finding out what forms you need to fill out to make changes to what's withheld from your paycheck. With the ability to set aside up to $18,000 in a 401(k) for those under 50 or $24,000 for those 50 or older, most taxpayers won't find a bigger potential tax break.
2. Contribute to an IRA.
Putting money in a traditional IRA can help you reduce your taxable income. Maximum contributions for 2017 are $5,500 for those under 50 or $6,500 for those 50 or older. If your income is above certain limits, and you have access to a 401(k) or similar plan at work, then your ability to deduct IRA contributions could be reduced. The IRS also gives you a little extra time before you have to complete IRA contributions by providing a mid-April deadline.
3. Harvest tax losses on losing investments.
If you've lost money on stocks or other investments, you can claim a tax loss if you sell them by Dec. 31. You can use the resulting losses to offset gains on other sold investments, and if you have additional losses remaining, you can use up to $3,000 to offset other kinds of taxable income, such as interest income or even wages. There are rules to follow to ensure you can claim your loss, but tax-loss harvesting can be a great way to salvage something from an investing mistake.
4. Open a health savings account if you qualify.
Health savings accounts let you set aside money to cover healthcare expenses if you have insurance coverage that includes high deductibles. Those whose policies only cover themselves can deduct up to $3,400 in contributions, while those with family policy coverage can deduct up to $6,750 in 2017. Those who are 55 or older can add an extra $1,000. To qualify, an HSA-linked insurance plan must have deductibles of at least $1,300 for self-only coverage or $2,600 for families, and out-of-pocket maximums can be no greater than $6,550 for self only or $13,100 for family coverage. The best part is that HSA distributions are tax-free if used for qualifying healthcare expenses.
5. Give money to charity.
Those who itemize their deductions can claim the gifts they make to qualifying charitable organizations. That includes both cash gifts and gifts of property, such as clothing, vehicles, or even stock. Deductions are limited to the fair market value of what you give away. With potential tax changes taking effect that could make it less valuable for taxpayers to itemize, consider making additional charitable gifts for 2018 earlier than normal to maximize your deduction.
6. Pay your state and local taxes early.
Whether you owe income or property taxes, paying them early could be an especially smart move this year. Taxes are generally deductible in the year you pay them, even if they technically aren't due until the following year. Tax reform provisions would limit or eliminate deductions for certain state and local taxes, so paying them in 2017 could be your last chance to take advantage of these favorable itemized deduction provisions.
7. Look at your medical expenses to see if they're deductible.
Relatively few people can deduct medical expenses as an itemized deduction because there's a threshold of 7.5% of income for seniors or 10% of income for others that applies before deductions are available. Nevertheless, it's important to look at your medical expenses to see if they'd be deductible. In some cases, getting procedures done before year-end could be the best way to get a tax break for the healthcare you need. Moreover, this is another provision that could disappear if tax reform passes.
8. Set a January timeline to sell winning investments.
If you've been successful with your investments, then hold off on selling them until after Dec. 31. That way, any gains won't be taxed on your 2017 returns, and you'll have until the time you file your 2018 taxes in early 2019 before you're faced with the resulting tax liability. Doing so does run the risk of bad news causing the price of the investments you own to fall. But depending on how much you've made and the risk level of the particular investment, you can make an informed decision about whether it's worth the risk.
9. Avoid buying mutual funds near the end of the year.
Mutual fund investors often get surprised by year-end capital gains distributions that can have a dramatic impact on their tax liability. Because of the way that funds work, you can end up paying taxes on gains that you personally didn't earn. To avoid this, it's best simply to wait on purchasing new fund shares in a taxable account until after the year-end distribution gets paid. Those who invest in IRAs and other tax-favored accounts don't have to worry about the impact of fund distributions.
10. Look at your tax withholding from your paycheck.
Finally, take a close look at how much tax you've had withheld from your pay over the year and compare it to how much you expect your taxes to be. If you've had too much money withheld, you'll get a big refund, but you're essentially giving the IRS an interest-free loan throughout the year. It can be smarter to adjust your withholding to get slightly bigger paychecks, letting you enjoy your money sooner. By contrast, if you're not having enough money withheld, adjusting withholding higher can help you avoid penalties, as well as the difficulty in coming up with a lot of money at tax time.