As 2017 comes to a close, we want you to be able to maximize your tax return next Spring. Here are a few tips from Travis Cullman, our Financial Advisor partner with Raymond James Financial Group.
Here are 10 things to consider as you weigh potential tax moves between now and the end of the year.
1. Set aside time to plan
Effective planning requires that you have a good understanding of your current
tax situation, as well as a reasonable estimate of how your circumstances might
change next year. There’s a real opportunity for tax savings if you’ll be paying
taxes at a lower rate in one year than in the other. However, the window for
most tax-saving moves closes on December 31, so don’t procrastinate.
2. Defer income to next year
Consider opportunities to defer income to 2018, particularly if you think you
may be in a lower tax bracket then. For example, you may be able to defer a
year-end bonus or delay the collection of business debts, rents, and payments
for services. Doing so may enable you to postpone payment of tax on the
income until next year.
3. Accelerate deductions
You might also look for opportunities to accelerate deductions into the current
tax year. If you itemize deductions, making payments for deductible expenses
such as medical expenses, qualifying interest, and state taxes before the end of
the year, instead of paying them in early 2018, could make a difference on your
4. Factor in the AMT
If you’re subject to the alternative minimum tax (AMT), traditional year-end
maneuvers such as deferring income and accelerating deductions can have a
negative effect. Essentially a separate federal income tax system with its own
rates and rules, the AMT effectively disallows a number of itemized deductions.
For example, if you’re subject to the AMT in 2017, prepaying 2018 state and
local taxes probably won’t help your 2017 tax situation, but could hurt your
2018 bottom line. Taking the time to determine whether you may be subject to
the AMT before you make any year-end moves could help save you from
making a costly mistake.
5. Bump up withholding to cover a tax shortfall
If it looks as though you’re going to owe federal income tax for the year,
especially if you think you may be subject to an estimated tax penalty, consider
asking your employer (via Form W-4) to increase your withholding for the
remainder of the year to cover the shortfall. The biggest advantage in doing so
is that withholding is considered as having been paid evenly through the year
instead of when the dollars are actually taken from your paycheck. This strategy
can also be used to make up for low or missing quarterly estimated tax payments.
6. Maximize retirement savings
Deductible contributions to a traditional IRA and pre-tax contributions to an
employer-sponsored retirement plan such as a 401(k) can reduce your 2017
taxable income. If you haven’t already contributed up to the maximum amount
allowed, consider doing so by year-end.
7. Take any required distributions
Once you reach age 70½, you generally must start taking required minimum
distributions (RMDs) from traditional IRAs and employer-sponsored retirement
plans (an exception may apply if you’re still working for the employer
sponsoring the plan). Take any distributions by the date required — the end of
the year for most individuals. The penalty for failing to do so is substantial: 50%
of any amount that you failed to distribute as required.
8. Weigh year-end investment moves
You shouldn’t let tax considerations drive your investment decisions. However,
it’s worth considering the tax implications of any year-end investment moves
that you make. For example, if you have realized net capital gains from selling
securities at a profit, you might avoid being taxed on some or all of those gains
by selling losing positions. Any losses over and above the amount of your gains
can be used to offset up to $3,000 of ordinary income ($1,500 if your filing
status is married filing separately) or carried forward to reduce your taxes in
9. Beware the net investment income tax
Don’t forget to account for the 3.8% net investment income tax. This additional
tax may apply to some or all of your net investment income if your modified AGI
exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing
separately, $200,000 if head of household).
10. Get help if you need it
There’s a lot to think about when it comes to tax planning. That’s why it often
makes sense to talk to a tax professional who is able to evaluate your situation
and help you determine if any year-end moves make sense for you.
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