If you are thinking about donating to a charity or church, why not do it before the New Year? Money and items donated to a charitable organization in December will likely generate tax savings a year earlier than January donations. If you donate appreciated stocks that you have held for longer than a year, you will receive a tax deduction while avoiding capital gains. In 2017, this strategy may be particularly important since a new tax law could increase the standard deduction and eliminate the tax benefit of charitable contributions for many tax payers.
If you expect this year’s income to be similar to or lower than next year’s, pay January’s mortgage payment in December. If you are self-employed, prepay rents, utilities, advertising costs and other business expenses. If business equipment is needed early next year, consider purchasing it in December instead.
If you are expecting a year-end bonus, ask your employer to postpone it a couple weeks. If you are self-employed, send out December’s invoices in January. Deferring income (and prepaying expenses) should only be done if you expect to be in a lower or similar tax bracket next year. If you expect your income to increase substantially, you may wish to defer expenses and hasten the collection of income.
Consider increasing your contribution to your 401(k), 403(b), IRA or other qualified plan. In the special case of a traditional IRA, you have until April 15th of next year to make a tax deductible contribution for the current year. If you own a business, consider setting up a retirement plan for next calendar year. As with all strategies, the total tax savings of contributing to a retirement account depends on your marginal tax bracket. For example, someone in the 25% marginal tax bracket would save $250 in taxes per $1000 of contributions.
If you own an unincorporated business, you can pay your minor children to work in the business without paying social security and Medicare taxes on their wages. This can be a great opportunity to transfer income into a lower tax bracket. If your children have worked for you during the year, be sure to pay them by December 31. Keep in mind state child labor laws concerning minimum age requirements and other regulations.
Look carefully at your portfolio. Do you have any stocks that have lost a lot of value and have little chance of rebounding? Sell such “loser stocks” before the end of the year to offset any capital gains incurred during the year. After you have offset your capital gains, you may deduct up to $3,000 of capital losses against your ordinary income.
Some expenses, such as medical expenses and unreimbursed employee expenses, will not result in any deduction unless they exceed a certain amount. Medical expenses, for example, are only deductible to the extent they exceed 10% of your adjusted gross income (AGI). Someone with an AGI of $100,000 would not have deductible medical expenses unless those expenses exceeded $10,000. In that situation, paying $8,000 of medical expenses in this year and then another $8,000 next year would not result in any tax deduction. If these expenses could be somehow “clumped” into one year so as to exceed $10,000, a tax write-off would result.
The IRS offers large tax credits and deductions for out-of-pocket education expenses. Paying tuition for you or a dependent before the end of this year will allow you to claim those credits and deductions on this year’s tax return. For example, you may want to pay the winter semester tuition bill in December. If you or a dependent is an undergraduate student who qualifies for the American Opportunity credit, be sure to spend at least $2000 on tuition and qualifying expenses during the year if at all possible, as you may be able to qualify for a 100% tax credit on this amount.
Converting retirement funds from a traditional account to a Roth account creates taxable income; however, it can enable tax-free distributions in the future. If your income recently decreased, this could be a great year to make a conversion. Contact one of our CPA’s to determine the proper amount and timing.
If you own a business, electing to be taxed as an S-Corporation can potentially save you several thousand dollars in taxes. Since this is a complicated area of tax law, be sure to consult with one of our CPA’s.
Disclaimer: While PorterKinney PC has made every attempt to ensure the accuracy of this document, it is not responsible for any errors or omissions, or for the results obtained from the use of the information in this presentation. This document been prepared for information purposes and general guidance only and does not constitute legal, accounting or other professional advice. Circular 230 Notice: The information included in this presentation is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties or (2) promoting, marketing, or recommending to another party any tax related matters.