The good news is a resounding yes, especially if you start your year-end tax planning right now.
There are three major avenues, broadly speaking, for lowering your 2016 tax bill. Let’s take a detailed look at each one so that you can determine which ones are a good fit for you.
Doing good: charitable gift giving
You probably have noticed your inbox fills up with requests for end-of-year giving. Charities understand that many of us sit down and calculate our budgets for cash donations at the end of every year.
- For cash gifts, always ask for a receipt from the charity. For gifts of $250 and above, receipts are a necessity, but it’s also good practice for any size cash gift.
There are, however, other great ways to receive tax benefits while also doing good.
- Open a donor advised fund and get immediate tax benefits—or contribute more to the fund you have. A donor advised fund acts like a foundation in that it grants funds to registered charities which you may designate ahead of time. It is managed by a public charity itself, typically a local community foundation. Your donor advised fund contributions incur no capital gains or estate taxes.
- Donate shares of appreciated stocks or mutual funds that you have had in your portfolio for more than one year directly to your favorite charitable cause. This type of gift wipes out the capital gains tax you would pay on the increased value of the shares. Note for your tax calculation that the deduction is the fair market value of the shares on the day you made the gift.
- Do your spring cleaning this season, and donate items you don't need now if you itemize deductions. Talk to your certified tax professional about how you can benefit by in-kind giving to your favorite charities, whether your gift is an old vehicle, a stack of books, clothing, tools or equipment—anything you find in your home or garage to donate.
Fatten your retirement plan
Whether you have a company-sponsored retirement plan like a 401(K) or your own traditional IRA, contribute as much as you can up to your limit before the end of the year to reduce your tax burden for this calendar year.
- Note that in company-sponsored retirement plans, for funds to count as pretax contributions, they must be handled as payroll deductions.
- What is the maximum allowed for 401(K)s in 2016? It is $18,000 if you are under age 50, or $24,000 if you are at least age 50.
- The IRS states that for 2016, your total contributions to all of your traditional and Roth IRAs max out at $5,500 (or $6,500 if you are at least 50) or your taxable compensation for the year, if your compensation was less than this dollar limit. Note: these limits do not apply to rollovers.
- As a longer-range planning tip, consider whether you think your earned income will go higher in the future. Talk to your certified financial planner about the option of a Roth IRA if you fall under that category.
“Harvest” your losses
Known as loss harvesting, if you have a portfolio of investments that fall outside a company-sponsored retirement plan, and which experienced some losses this year, consider using these losses as offsets to any appreciated securities that you sold this year.
Additional avenues for tax savings
Determine whether these fit your current situation and consult with your professional tax planner to ensure that they would work for you:
- Deferring any additional income that you can to the next calendar year—such as bonuses or income from freelance work—particularly if you are on the cusp of a tax bracket.
- Using your FSA funds: do you have a Flexible Spending Plan with funds still available? See whether your employer has created a path for you to keep $500 in the fund for next year. If the company has not, consider using the available funds this calendar year.
We all know how complex the tax code is, but there are a few simple steps you can take now to protect your hard-earned income. At Chandler & Knowles CPAs, we would be happy to make sure that you are maximizing your deductions. Please contact us for a timely consultation on year-end tax planning.