With 2018 right around the corner, many taxpayers have started to consider how they will form their year-end tax plans. There are a variety of crucial focal points that should be taken into consideration when planning taxes for the new year; some are timeless while others are specifically relevant in the context of the 2017-18 transition.
Here are a few helpful tips for effective year-end tax planning.
Required Minimum Distributions (RMDs) are a significant factor in many people’s year-end tax planning, but they are also occasionally overlooked. RMDs refer to “the amount that traditional, SEP or SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year they reach age 70.5.” These amounts are then distributed each subsequent year based on current calculation amounts.
There is a heavy penalty (usually in the realm of a 50% tax penalty) for failing to take required RMDs, so make sure you are keeping tabs on this information as you conceptualize your year-end tax plan.
Deferring certain income is consistently regarded as a wise year-end tax planning technique — depending on your situation. Income is taxed in the year it is received, so this method’s benefits are clear when applicable. While it is usually hard to defer wage and salary income, you may be able to defer year-end bonuses, assuming it is standard practice in your place of employment.
If you think you will sit in the same or a similar tax bracket during the new year, deferment may be an effective planning strategy for you (otherwise, you may run the risk of being hit with a bigger tax bill in the new year).
Take advantage of losing investments
“Loss harvesting” is a key year-end tax strategy in which one sells significant investments (perhaps on stocks and mutual funds) to identify losses. These sellers then use losses to “offset any taxable gains they have realized during the year,” offsetting gains dollar-for-dollar. If losses represent amounts more than gains, you can utilize up to $3,000 of excess loss to eliminate other income.
Pay medical expenses
Be sure to pay off outstanding medical expenses using pre-tax dollars, using Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). All other funds can accumulate as retirement savings. This strategy is especially urgent and fruitful, as most FSAs follow a “use it or lose it” system where funds are unable to roll over annually.