Reduce Your Taxes before the End of the Year
Provided by HG.org
Prudent taxpayers can reduce their tax burden or increase their tax refund by taking some last-minute steps before the end of the calendar year.
Income is taxed in the year when it is received, not when it is earned. Therefore, if you can defer your income, you can put off the tax associated with it until next year. It is often difficult for hourly employees to postpone their wages or salary employees to postpone their salaries. However, employees may be able to defer a bonus until next year. If you are self-employed or complete contract work, you can wait to bill your clients until next year. When using this strategy, it is important to avoid deferring income that will cause you to be in a higher income tax bracket. If this may occur, it is best to accelerate income during the current year to decrease the income next year.
One way to lower taxes is to increase the deductions that you apply to your taxes. Deductions are based on specific circumstances and current tax laws. One possible way to reduce taxes is to donate to charity. A persona may choose to donate appreciated stock or property rather than liquid cash. In some situations, a person may be able to deduct the market value of the property on the date that the gift is made while also avoiding paying a capital gains tax from the appreciated amount.
Another possible tax deduction is to pay off a doctor’s or hospital bill. A taxpayer may also choose to pay property tax or estimated tax bill that is due early in the next year.
More opportunities are available to taxpayers who itemize their deductions instead of making standard deductions. One common tax strategy is to deduct as many expenses as possible in one year to exceed the standard deduction year. The next year, the taxpayer may then use the standard deduction while the taxpayer tries to push as many deductible expenses as possible into the following year.
Check Your Business
If you own a business, you may also focus on increasing deductions. Businesses may also focus on paying as many expenses as possible during the current year to maximize deductions. Business owners may elect to take on a major capital expenditure at the end of the year instead of waiting until the next year.
Other possible ways to increase deductions for a business including paying employee bonuses at the end of the year, prepaying expenses, purchasing additional equipment and making a bulk purchase. These steps allow a business to take the deduction during the current tax year.
Invest in Your Future
Retirement contributions can be tax-deductible in the year that you make them for traditional individual retirement accounts. This allows you and your spouse to deduct the full amount of individual retirement account contributions you two make if you are not covered by a retirement plan at work. If you are currently covered by an employer’s plan, your contribution may be limited depending on your adjusted gross income.
If you can contribute to an individual retirement account and you are in the 35-percent tax bracket, you can make a deductible contribution up to $5,500 as of 2017. This may allow a person to save up to $1,925 in taxes. For people older than 49, the maximum contribution is $6,500. Taxpayers have until the tax filing day to take advantage of this particular trick. Individual retirement accounts allow a person to invest funds while deferring taxes.
You can increase contributions in an employer-sponsored plan to increase your deductions. You can invest a maximum of $18,000 in 2017 or $24,000 if you are older than 49. Self-employed individuals can invest in Keogh plans.
Take Capital Losses
Another way to improve your tax situation is to take capital losses. If you have lost money on an investment such as a stock, you can report the loss to reduce your tax obligation. You must first realize the loss to take advantage of this strategy. If you have capital gains during the same year, the strategy offsets the capital gains. This prevents you from having to pay taxes on capital gains.
Additionally, if your capital losses are greater than your capital gains, current tax laws permit you to use up to $3,000 of the loss to offset your taxable income. If you have more than $3,000 in capital losses, you may wish to carry a part of the loss onto next year’s taxes. Taxpayers should be careful to avoid taking steps that minimize your tax benefits. For example, if you purchase the same investment or one that is substantially similar within 30 days before or after you take a tax loss, your loss will be disallowed.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.