While the holidays bring plenty of cheer, not many people think about the joys of saving money on taxes. But with a little planning, your tax savings can help pay for the extra shopping you did on Black Friday and throughout the holiday season.
Read on for tax tips that will help you score big when you file your tax return in the spring.
1. Maximize Retirement Account Contributions
The easiest way to lower your tax bill and set yourself up for a more prosperous retirement is to max out your contributions to your retirement plan. You can increase your 401k account contributions through the end of the year by changing your contribution rates with your employer. And, check your employer's matching contribution level to grow your nest egg even more.
You might also be able to reduce your taxes by contributing to a traditional IRA account as a last-minute tax deduction. However, if you or your spouse are covered by an employer plan, like a 401k or 403b, you might not be eligible to deduct your contributions if you make too much money. For 2017, the maximum you can contribute throughout the year to a traditional IRA is $5,500 ($6,500 if you're 50 or older). Whereas 401k plans cap at $18,000 ($24,000 if you are 50 or older).
2. Convert to a Roth
If you find yourself in a lower income tax bracket than you expect to be in future years, consider converting some of your traditional IRA savings to a Roth IRA. When you convert, the conversion amount is taxed at your marginal tax rate, so that lower tax rate will apply to the converted income.
For example, say you lost your job in March and didn't find a new one until November, and your taxable income is much lower this year so you're only paying a marginal rate of 15 percent instead of 28 percent. If you convert a portion of your traditional IRA to a Roth IRA, you can pay taxes on the conversion at the lower rate and then enjoy tax-free qualified distributions in retirement.
Roth vs. Traditional IRA: Which Retirement Plan Is Best for Me?
3. Lump Medical Expenses in One Year
Medical expenses can be challenging to deduct because not only do you have to itemize your deductions, but you are also limited to deducting only the portion of your medical expenses that exceed 10 percent of your gross adjusted income (7.5 percent if you or your spouse is 65 or older).
But you can increase your deduction if you strategically schedule procedures and payment dates. Expenses are deductible in the year you pay for them, so if you've already paid substantial bills, try to pay for as much as possible before the end of the year to maximize your deduction. It should go without saying that you shouldn't let tax considerations make important medical decisions for you, but if you have flexibility, you can take advantage to lower your tax bill.
4. Don’t Forget About HSA Contributions
If you have a high-deductible health insurance plan, you can contribute money to your health savings account to reduce your tax bill. HSAs offer triple tax benefits: Contributions are excluded from your taxable income, the money in the HSA grows tax-free, and — as long as you use the money for qualified medical expenses — your distributions come out tax-free. For 2017, you are allowed to contribute a maximum of $3,350 if you are covered by an individual plan or $6,750 for a family plan. If you're over 55, the contribution limit is bumped up by $1,000.
HSA vs. FSA: How to Choose the Best Healthcare Account
5. Make Your January Mortgage Payment Early
Mortgage interest is deductible in the year that you pay it rather than the year that the interest accrued. Often, monthly mortgage payments are made a few days into each month to cover the previous month. For example, the interest that accrues on your mortgage in June doesn't get paid until you make your monthly payment in early July. Usually, that doesn't affect your taxes.
The exception comes at the end of the year. For example, if you pay December's accrued interest on Dec. 31, you get to claim that interest on your taxes for the current year. If you don't pay it until early January, you can't claim it on your taxes until the following year.
6. Make a Charitable Contribution
You can deduct charitable giving up to 50 percent of your adjusted gross income as long as you itemize your deductions.
If you really want to maximize your tax breaks, contribute appreciated securities to charity. If the gains on the stock would have counted as long-term capital gains had you sold the stock, you can deduct the fair market value of the stock (not just what you paid for it). Then you never have to pay taxes on those gains.
However, you must give to an actual charity. You can't deduct gifts you make to other people, no matter how needy they are, and you can't deduct the value of your time you spend volunteering.
7. Sell Investments with Losses
If you have some investments that haven't performed as well as you hoped, consider selling them before the end of the year so you can claim a loss on your taxes, otherwise known as tax-loss harvesting.
You can offset all of your capital gains for the year with capital losses plus up to $3,000 of ordinary income (limited to $1,500 if you are married filing separately). Just don't repurchase the same securities within 30 days of the sale, otherwise the IRS will consider it a "wash sale" and disallow the deduction.
8. Increase Tax Withholding If You Expect to Owe
For most people, taxes withheld from paychecks are sufficient to pay what they owe when they file their tax returns, or at least to avoid underwithholding penalties. However, if you had income that wasn't subject to withholding, such as income from selling stocks or a home, you might come up short. As long as you owe less than $1,000, or have withholding equal to at least 90 percent of what you owe this year — or 100 percent of what you owed the prior year — you're safe.
But if you're not going to make one of those "safe harbors," ask your employer to withhold extra on your last few paychecks. That money is treated as being withheld throughout the year, which can reduce or eliminate underpayment penalties and interest.