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2017 is winding down, and so are your chances to guarantee yourself a low tax burden and an easy-to-prepare tax return. So before you get too wrapped up in holiday cares, consider making these smart tax moves to improve your financial situation both for this year and the next one. You might even save enough on taxes to pay for the next year's holiday expenses.
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1. Get organized
You probably won't start receiving tax documents until January, but now is the time to get ready for them. Set up a place where you can store your documents until you start working on the return; that way you can put them away as soon as you get them instead of scattering documents all over the house (and possibly never finding them again). If you don't already have one, consider getting a small filing cabinet and making a separate folder for each tax year. Not only does this make preparing your return easier, it ensures that you'll still have the documents you need if the IRS comes back to you with any questions. Keep tax forms, receipts and other backup documentation for at least five years after the tax year in question; some documents you should hang onto forever, such as anything listing how much you paid for property or investments that you still own.
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2. Add up itemized deductions
One of the most important decisions you'll have to make tax-wise is whether or not to itemize deductions. If your itemized deductions add up to more than the standard deduction ($6,350 for single filers, $9,350 for heads of household, and $12,700 for married filing jointly in 2017), then itemizing will result in a lower tax bill.
If it turns out that your total itemized deductions are higher than the standard deduction or close to it, now is the time to max out those deductions. With the holiday season coming, you likely need to make more room anyway; why not collect up the stuff you're no longer using and make a charitable donation out of it? The charitable deduction is an itemized one, and by donating property instead of (or in addition to) money, you can get a nice tax break without spending a dime. Another option is to move medical expenses that you intended for the following year to the current one. For example, if you have a dentist appointment scheduled for next January, see if you can move it to December instead. Wrangling with your insurance company over reimbursement for a theft or loss? Consider settling with them so that you can claim the casualty or loss deduction for 2017.
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3. Calculate your income
Now that you're so close to the end of the year, you probably won't have much trouble figuring out what your annual income for the year will be. Figuring this out before 2018 begins gives you a chance to shift your taxable income down a bit, if doing so is worthwhile.
For example, if your income for the year is just over the net investment income tax threshold ($250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for everyone else), see if you can scrape up some more deductions to drop you under the threshold and avert the tax. Lowering your taxable income a bit can also make you eligible for more deductions and credits, including the Savers Credit, the Lifetime Learning Credit, and the Earned Income Credit.
Finally, if you're right on the edge of one of the 2017 tax brackets, lowering your income enough to drop you to the next bracket down can result in some nice tax savings. This can be particularly helpful if you will be paying capital gains taxes, since short-term capital gains tax rates are the same as your highest income tax bracket and your long-term capital gains tax rate may also go down if you drop a bracket.
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4. 70 1/2 or older? Take your RMD
Retirees age 70 1/2 or older must take a required minimum distribution, or RMD, from their traditional IRAs every year. If you haven't already taken your RMD for 2017, do so right away – missing it will result in a gruesomely high tax penalty of 50% of the amount you failed to take. For example, if your RMD for the year was $30,000 and you only took $10,000 from your non-Roth IRAs, you'll be charged a penalty of 50% of the $20,000 you didn't take (yes, that's an extra $10,000 tacked on to your tax bill).
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5. Prepay deductible expenses
With tax reform in the air, it makes sense to grab every deductible expense you can now -- who knows if they'll still be deductible in the near future? For example, consider paying any tuition you'll owe in early 2018 now so that you can claim the tuition and fees deduction for it. You could also make an estimated tax payment on your 2018 state and local taxes this month, which would allow you to deduct the payment from your current year's tax return (assuming you decide to itemize deductions).
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6. Contribute to tax-deferred accounts
If you haven't hit your annual contribution limits for your traditional 401(k), IRA, or other tax-deferred retirement savings accounts, now is the time to put in a last-minute contribution. Contributing to Roth accounts won't help your taxes in the current year, because those accounts get their tax break at the distribution end (though they can be a huge help in reducing your tax bill once you retire).
Contributing to a health savings account can also be a terrific tax-saver both now and in the future. Don't have an HSA? Check if your current health insurance plan is HSA-compatible, and if so, open one right now and dump in as much as you can manage (up to the 2017 limit of $3,400 for individual plans and $6,750 for family plans). Contributions to HSAs get you the same tax deduction as contributions to non-Roth IRAs.
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7. Consider selling at a loss
If you've made some capital gains in 2017 (meaning that you sold investments at a profit), you'll likely have to pay capital gains taxes on your tax return for the year. However, you can cancel out those gains by selling investments on which you've lost money. Capital losses cancel out capital gains, and if you have more losses than gains, you can use them to wipe out up to $3,000 of ordinary income from your tax return. This strategy is called tax loss harvesting, and while you don't want to sell any investment purely for tax purposes, if you've got a dog of an investment that you've been meaning to sell anyway you might as well time the sale so that you can save some money on your taxes.
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8. Find a tax preparer
Not everyone needs to hire a professional to do their tax return. If you've got quite a simple return, one that qualifies for the Form 1040 EZ, you can probably do just as well preparing it as a professional. But if you've got some complicated tax issues, finding a CPA or enrolled agent is a good idea. The best way to find a tax professional is by getting referrals from people you trust; you can also use the NAEA locator to find a qualified tax pro in your area, or check CPA Verify to confirm that a particular CPA is fully licensed.
If you can get some of these tax tasks done before the end of the year, you'll be able to wipe one financial concern from your mind before starting your new year – not to mention all the money you stand to save in the process. Given how expensive the holidays can be, the prospect of saving a significant amount on your taxes should be enough to make your December a whole lot jollier.
