About this time every year, I write a column about year-end income tax strategies.
December may seem a bit late, but it is never too late to think about lowering your income tax bill.
Most tax planning is about deferring income, shifting income or using deductions and credits to your benefit.
Timing is everything in life, and nothing is truer than when planning for income taxes.
Deferring income in 2016 may be a smart move.
How do you do it? Of course, maximizing you 401(k) or 403(b) retirement plans is a good idea. There are just a few weeks left in the year. Increasing deductions and contributions may help lower your taxable income.
Assuming you are in a combined federal and state tax bracket of say 30 percent, a $1,000 deferral will cut your tax bill by $300.
If you have the option to defer bonuses or other income, do it now. Self-employed individuals have more options here. If you know that you are having a high-income year, waiting to invoice new work may delay the receipt of income until 2017.
Accelerating charitable gifts is another good tax reduction strategy if you itemize your deductions. Gifting appreciated property rather than cash might work, too.
Don’t sell the appreciated asset and then give. You will have a capital gain tax that way. If you give the entire asset, there is no gain to you.
Opening Individual Retirement Accounts (IRAs) is always a good idea, but check the deductibility rules. Roth IRAs may also help a little with tax deferral on any earnings in the Roth.
Again, self-employed taxpayers have many retirement plan options, including a “solo 401(k),” which allows massive deductions if the facts fit the plan.
Itemized deductions offer several possibilities for tax reductions. Paying taxes early, in 2016, may make your deduction larger. This includes property tax and state income tax payments.
Talk to your tax adviser about triggering the Alternative Minimum Tax by bunching deductions. This is not a pleasant surprise when you file.
Investors have many options for helping lower taxes from investing in municipal bonds to using high dividend paying stocks, which are taxed at a lower rate.
Year-end tax selling, which includes taking losses on poor performers and offsetting the loss while harvesting the gain from good performers, may make some sense. Some investors then buy back the good performers but remember to not violate the “30-day wash” rules.
You must know your cost basis and length of ownership before using this strategy.
Remember, you have no responsibility to pay more income taxes than you are legally required. Ignorance of the tax law is a poor reason for overpaying. It is your money first, not the government’s.