Before you know it another tax season will be upon us. Do your wallet a favor and score all the deductions you can with these last-minute ways to reduce your bill in 2016.
Year-end investment account balancing is a no-brainer. If you have a taxable investment account, you should review your transactions for the year to see if you're in a net capital gain situation. If you are — says Jacob Dayan, co-founder of tax-relief service Community Tax — find some losing positions that will offset the gains and liquidate them by the last business day of December.
"If you wish to remain invested in these assets long-term, you can buy them back after 30 days," he adds. "Note that this strategy also works in reverse, with one difference. If you sell a net-gain position, you don't have to wait 30 days to buy it back. In either case, if you have positions involving multiple purchases over time, identify the specific assets you want to liquidate by purchase transaction to give you the greatest tax benefit."
'Tis the season to give unto others — if only for the tax breaks. You have until the end of the year to make charitable donations that will count toward your 2016 contributions for tax purposes.
"All charitable donations made to qualifying organizations before December 31 will count toward your 2016 deduction, as long as you itemize your deductions," says Pennsylvania-based certified public accountant William Ray. "Deductions are generally limited to 50% of your adjusted gross income, although additional restrictions may apply for those in higher income brackets. You may also deduct the current fair market value — not your original cost — of noncash contributions made to qualifying organizations. Certain noncash contributions may require additional support or an appraisal, so you should review IRS Publication 526 before claiming noncash contributions."
It's also important to track your volunteer time.
Ray adds, "Although you cannot make a deduction for your time, you may claim a deduction for any mileage driven using your personal vehicle ($0.14 per mile) and any out of pocket expenses that are not reimbursed. As is the case with any deduction, documentation and support should always be maintained for all contributions."
Financial planner Andy Yadro details another option for end-of-year giving.
"Consider contributing to a donor-advised fund," he suggests. "You get an immediate tax benefit and your money can be invested with potential to grow. This is a great last minute option for someone who wants to make a donation, but hasn't decided which charity it should go to."
Were you fortunate enough to get a holiday bonus? Use it to top of your tax-deferred retirement accounts such as an IRA. Even better, kick in a few extra dollars from your regular paycheck. You'll boost your savings while reducing your taxable income. However, be aware of the contribution limits for both types of retirement account.
"If you or your spouse are not covered by a retirement plan through your employer, you're both eligible to contribute up to $5,500 each to an IRA ($6,500 if you are over age 50)," Ray says. "You may be eligible to make a contribution, even if you are covered by a retirement plan through your employer, depending on your income."
You also have until April 15, 2017, to make this contribution and still have it count toward your 2016 taxes. However, it's highly recommended that you do not file your tax return until you make the contribution. If you claim the deduction but cannot pay, you'll need to file an amended tax return by April 15, 2017, or pay penalties and interest.
If you itemize deductions, you can claim a deduction for state income taxes paid during the calendar year. This includes any amounts paid for your 2015 tax liability that were paid in calendar year 2016.
"If you consistently owe taxes on your state or local tax returns, paying them early can result in immediate federal tax savings," Ray explains. "States and localities allow you to make estimated tax payments or prepayments at any time during the year. If you make a payment before December 31, 2016, that payment can be deducted on your 2016 federal tax return. But be careful of overpaying. If you overpay and receive a state or local income tax refund, you will need to claim that as income on your 2017 federal tax return."
If you're covered by a high-deductible health plan, you may qualify for a Health Savings Account (HSA) and contribute $3,350 ($6,750 for a family) to the plan — all of it tax-deductible.
"Many employers now offer high-deductible health plans, meaning employees often have to pay thousands toward a deductible before their health coverage kicks in," Ray says.
To offset this cost, you may qualify for an HSA.
"An HSA is basically a 'retirement account for health care' and is becoming more common each year," Ray continues. "The HSA allows you to contribute to an investment account that can grow tax free over time, while receiving a deduction on your tax return. You even receive a deduction if you don't itemize. The account can then be used to cover qualifying medical costs. Unlike a Flexible Spending Account (FSA), an HSA is 'your money' and can grow over time, rather than being forfeited at the end of the year."
If you foresee a changing income situation, supplement next year's loss with a right-now gain. Yadro suggests prepaying your real estate taxes and taking the deduction now.