Finances are a common focal point of New Year's resolutions, but it's wise to start thinking about taxes before the end of the year. Although federal and state income taxes don't need to be filed until mid-April, many deductions and credits depend on what happens before the ball drops Dec. 31. Here are 10 money-saving tax moves to consider before the deadline.
10 Smart Tax Moves to Make Before the End of the Year
Before trying to take advantage of money-saving tax strategies, find out where you stand by going over the year's financial documents. Try to calculate ordinary income, capital gains, deductions, and tax credits for these 12 months.
The holidays are a time to think about others, and many people choose to donate money or tangible goods to charity. Taxpayers who itemize deductions can claim one when donating to a qualified organization, such as a nonprofit 501(c)(3) or select religious institution. Know the rules -- deductions are generally based on the fair market value of the donated item, which may not be the same as the original cost.
For taxpayers who expect to be in the same tax bracket or a lower one next year, it might make sense to delay some income until after Jan. 1 and reduce their 2017 tax bill. This may not be possible to arrange with a set salary, but employees eligible for bonuses may be able to request a payout in the new year. Self-employed workers can delay sending invoices until January.
Taxpayers in a lower tax bracket than usual this year may want to take the opportunity to sell investments that have done well and declare the extra income for 2017. Individuals with 2017 adjusted gross income, including capital gains, of up to $37,950 and married couples filing jointly with income up to $75,900 do not have to pay federal income taxes on capital gains from the sale of assets held longer than a year. The investment can be immediately rebought if it's a desirable part of a portfolio.
Investors seeking a way to decrease their adjusted gross income for 2017 can sell assets at a loss. (Don't get tricky. Rebuying a "substantially identical" asset within 30 days can trigger the wash-sale rule and disallow the deduction.) When done properly, "harvesting" capital losses can offset income from capital gains and up to $3,000 worth of other types of income, such as wages. Excess capital losses can roll over to future years.
The annual tax exclusion for gifts lets individuals give up to $14,000 to another person without having to file any additional paperwork. Gifts of more than $14,000, or $28,000 if coming from a married couple, require the givers to file Form 709, and the excess gets counted toward the giver's lifetime estate tax exemption. It's unlikely that most people will ever have to pay a tax on gifts. As of 2018, the annual exemption is $15,000 and the lifetime exemption is $5.6 million.
Setting aside money in a traditional 401(k) or 403(b) may be a smart way to save for retirement and can help decrease income for the current year. In 2017, individuals can contribute up to $18,000, or $24,000 for those age 50 and older. (The figures jump $500 in 2018.)
Homeowners may be able to prepay January's mortgage bill and deduct the mortgage interest in 2017 if they itemize deductions. Parents of college students and taxpayers enrolled in continuing education can try to pay the next school term's tuition early, which can lead to tax savings via the American Opportunity Tax Credit or Lifetime Learning Credit, although there are income restrictions.
Medical expenses that exceed 10 percent of adjusted gross income may qualify for a medical expense deduction. Employees should also look for ways to spend any money left in a Flexible Spending Arrangement, because the balance might disappear at the end of the year. Some employers allow a 2.5-month grace period to spend a maximum $500 left over from one year to the next.
Except for people who qualify for an exemption, there is a potentially hefty penalty for not having minimum essential health coverage as defined by the Affordable Care Act. The Republican administration is shaking up the program, but a pending tax reform vote means the rules are still uncertain heading into 2018. So far, there's little question consumers should review their insurance plans to make sure they meet current requirements and apply for health insurance if they don't already have it.
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