Fourth Quarter Tax Planning Strategies

As 2017 comes to a close, there are some important tax planning strategies that prudent taxpayers may want to consider. Such strategies have the ability to save valuable tax dollars in the current tax year and/or to create an advantageous tax situation for the coming year. Year-end tax moves such as gifting assets, making charitable contributions, moving funds into or out of tax sheltered retirement plans and realizing capital gains and losses are all actions that should be considered in order to achieve the maximum possible tax advantage. Before the new tax year begins, taxpayers may also want to think about such things as changing withholding choices or adjusting the amount of estimated tax payments.

The following is a list of several important year-end tax considerations:

·        Maximize 401(k) and IRA Contributions

The 2017 contribution limit is $18,000 for 401(k) plans and $5,500 for IRAs ($24,000 and $6,500 respectively for individuals over 60). If these contribution limits have not been met by the end of the year, a taxpayer might be wise to think about the possibility of depositing whatever additional funds are allowed, thus reducing taxable income by the amount of the contribution.

·        Evaluate Capital Gains and Losses

Capital losses can be used to offset ordinary income up to a maximum of $3,000 per year or, dollar for dollar, to cancel out capital gains that have been made during the year. Both of these options save tax dollars by canceling out gains that would otherwise be counted as ordinary taxable income. The offsetting of capital gains with capitals losses is a year-end strategy often used by investors who use capital losses to offset investment gains in order to lighten the tax burden produced by the gains. Capital losses that are not used up in any calendar year can be carried forward to future tax years with no time limitations.

·        Defer End-of-Year Income

If a lower income is expected in a future tax year, a taxpayer should be consider the possibility of deferring income until after the first of that year. Although this is tax planning strategy that is most often used by businesses, it is sometimes available to individual taxpayers as in the case of deferring the receipt of a year-end bonus or postponing the sale of an appreciated asset. Deferring end-of-the-year income to a lower income year creates a tax advantage in that the deferred income will be then be subjected to a lower tax rate.

·        Meet Year-End Deadlines

In order to avoid penalties and/or maximize benefits, there are a number of tax related matters require consideration before the end of a calendar year. One of these is the required minimum distribution from an IRA which must be taken before December 31st every year after a taxpayer reaches the age of 70½. The amount of this distribution, which is determined by the IRS, is subject to a 50% excise tax if not distributed according to the set requirements. Another tax related item that is often regulated by calendar year time constrains is that of flex spending accounts. While the money placed in these accounts offers a tax advantage in that it is exempt from taxation, it is often lost if not used before December 31st. Taxpayers should therefore check the balances in these accounts before the year comes to a close.

Although tax planning strategies are always important, they are even more important as the tax year comes to a close because they affect the final balance sheet that is carried forward into tax season. To ignore available year-end tax moves such as those listed above almost automatically means that a taxpayer will report a higher taxable income and thus be taxed at a higher tax rate than would otherwise be the case.  

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