As the new year approaches, we’d like to provide you with information on ways you can lower your potential tax bill for 2016. Here are four strategies you may want to consider before year-end:
- Boost Your Retirement Savings – One of the best ways to lower your tax bill and save more for retirement is by putting money into a retirement savings account like a 401(k) or IRA. Plus, there are tax benefits for maxing out contributions. In 2017, you can contribute up to $18,000 to a 401(k) or similar retirement plan. And if you are over 50, you can add another $6,000 to your 401(k) savings as a catch-up contribution. Why does this matter? Well, for example, if you are in the 25 percent tax bracket and max out your 401(k) contributions, you could potentially save over $4,000 on your tax bill for that year.
- Flex your spending – An easy way to lower your taxes is to talk with you employer about what flex spending benefits they offer. Flexible spending plans are pre-taxed accounts that allow certain costs like medical expenses and dependent care to be paid with pre-tax dollars. Plus, withdrawals might be tax-free if you pay qualified medical expenses. These accounts help you lower your potential taxes with money you had planned on spending anyway on co-pays, prescriptions, daycare or a home health aid.
- Give Back – Charitable contributions help us feel good, and they can also lower your tax bill. There are many ways to give besides simply cutting a check. You can donate clothes and household items to organizations that help the needy and provide jobs. You can also write off some of the expenses stemming from volunteer work and travel costs to an event where you represented the charity. To get the deductions, be sure you are giving to an IRS-recognized charity, and itemize expenses on your tax form.
- Sell low performing investments to offset gains – Another way to lower your overall tax bill is to sell low performing investments such as stocks and mutual funds that have resulted in a loss. You can then use the losses to offset any taxable gains that you might have had in the year. Note: if you have long-term gains on stocks, you can only sell losing stocks that you’ve held long-term to claim losses against the gains. The same rule applies to short-term stocks.
It might seem a bit early to think about taxes, but with some advanced planning you can save on your 2016 tax bill and make important changes to your spending and/or saving habits to claim eligible deductions and credits on next year’s tax return.