Check the boxes on this list by December 31 and find out if you can potentially minimize your tax burden.
If you claim too few allowances on your W-4, you may end up with a refund at tax time. If you claim too many allowances, you may have taxes due. To avoid this kind of surprise in your own filing, use the IRS tax withholding estimator to find out if you’ve been withholding the right amount.
Take action: If you need to make adjustments, file a new W-4 at your workplace. If you can swing it, choose “0” allowances so you pay a larger chunk of taxes throughout the year. If the calculator shows you’ve been withholding too much, file a new W-4 and increase the number of your allowances.
Tax-advantaged retirement accounts (such as a traditional IRA or 401(k) plan) compound over time and are funded with pre-tax dollars. That makes them a great investment in your future. They’re also helpful at tax time, since any contributions you make to these plans lower your taxable income.
For the current tax year, the maximum allowable 401(k) contributions are as follows:
For the current tax year, the maximum allowable IRA contributions are as follows:
If you have an HSA (health savings account), consider maxing out contributions to that account as well (currently $3,600 for individuals, $7,200 for families and an additional $1,000 for individuals age 55+).
Take action: Can’t make the maximum contribution to your 401(k)? Try at least to contribute the amount your employer is willing to match. All 401(k) contributions must be made by December 31. You can make contributions to IRAs and HSAs up to the tax deadline each year.
All employer-sponsored retirement plans, traditional IRAs and SEP and SIMPLE IRAsrequire regular minimum distributions (RMDs) by the April 1 that follows the year you turn 72. Thereafter, annual withdrawals must happen by December 31 to avoid the penalty.*
RMDs are considered taxable income. If you don’t take the RMD, you face a 50 percent excise tax on the amount you should have withdrawn based on your age, life expectancy, and beginning-of-year account balance.
Take action: Take your RMD by December 31. Once you turn 72, you must take your first withdrawal on or before April 1 the following year to avoid penalty.
If you don’t need the cash flow and would prefer not to increase your taxable income, you may want to consider a Qualified Charitable Distribution (QCD), directly from your qualified account to a public charity. However, you won’t get the charitable contribution itemized deduction. QCDs are limited to $100,000 per year.
Tax-loss harvesting is a strategy by which you sell taxable* investment assets such as stocks, bonds and mutual funds at a loss to lower your tax liability. You can apply this loss against capital gains elsewhere in your portfolio, which reduces the capital gains tax you owe.
In a year when your capital losses outweigh gains, the IRS will let you to apply up to $3,000 in losses against your other income, and to carry over the remaining losses to offset income in future years.
The goal of tax-loss harvesting is to potentially defer income taxes many years into the future — ideally until after you retire, when you’d likely be in a lower tax bracket. This process lets your portfolio grow and compound more quickly than it would if you had to take money from it to pay the taxes on its gains.
Take action: Tax-loss harvesting requires you to diligently track tax loss across a portfolio, as well as monitor market movements, since the chance for tax-loss harvesting can occur at any time. A financial professional can help you identify any losses you can use to offset any gains.
*Note: Tax-loss harvesting does not apply to tax-advantaged accounts such as traditional, Roth, and SEP IRAs, 401(k)s and 529 plans.
Certain expenses, such as the following, can be classified as “itemized” deductions:
In order to itemize, your expenses in each category must be higher than a certain percentage of your adjusted gross income (AGI). For example, let’s say you’d like to itemize your medical expenses. Starting in the 2018 tax year, the threshold for itemizing medical expenses is 10 percent AGI. But maybe your medical expenses total 8 percent of your AGI each year, so you can’t itemize.
“Bunching” is a way to reach that minimum threshold. In this example, you could delay 2 percent of your expenses to the following year. And then you’d be more likely to reach the minimum 10 percent AGI that next tax season, allowing you to itemize.
Take action: If you’ve been waiting on certain medical and dental expenses or charitable contributions, you might want to hold off until a year in which you itemize. That way you’ll get the maximum value out of your deductions.
FSAs are basically bank accounts for out-of-pocket healthcare costs. An FSA earmarks your pre-tax dollars for medical expenses, lowering your taxable income.
When you tell your employer how much of each paycheck to set aside for your FSA, remember you’ll pay taxes on any funds still in the account on December 31*. Plus, you’ll lose access to the money unless your employer allows a certain amount in rollovers for the next calendar year.
Take action: Schedule any last-minute check-ups and eye exams by December 31. Fill prescriptions for you and your family. Still carrying a balance? Stock up on items approved for FSA spending (e.g., contact lenses, eyeglasses, bandages).
*Note: Some employers give you until March of the following year to use your FSA dollars.
With a little planning before the year ends, you can be better prepared for the upcoming tax season.
Did you know you can diversify your investments to minimize your potential tax burden? Read A guide to tax diversification in investing to learn more.