With the year-end approaching, it is always wise to consider a few tax planning opportunities. Some of these strategies may be affected by upcoming potential tax changes with the current administration. However, the basic tenants of tax planning still apply no matter what happens. These include:

REDUCE OR DELAY INCOME:money plant

Regardless of what tax bracket you are in, it generally is beneficial to reduce your income or defer to another year. This may be especially true if tax rates go down next year. Some strategies to consider include:

  1. Delaying or deferring income to another year if it is possible and prudent. You will want to talk with your CPA to make sure this is a viable option in your situation.
  2. If you are 70 ½ or older, you can contribute up to $100,000 directly from your IRA to a qualified charity. This avoids taxation of the income on the distribution and is the most tax efficient way to fund charitable assets from IRA funds.

MAXIMIZE YOUR DEDUCTIONS:

  1. Maximize charitable contributions. Also, consider gifting long-term appreciated stock or mutual funds to a charity. You avoid the capital gains on the stock and receive a deduction against your ordinary income.
  2. Sell stocks or mutual funds that are in a loss position. You can offset the loss against other capital gains or capital gain dividends. Any losses in excess of capital gains are deductible against your ordinary income up to $3,000.
  3. Maximize your retirement contributions. The maximum 401(k) deferral is $18,000, or $24,000 if you are 50 years old or older. If you own a business, consider all retirement plan options since some can provide greater contributions than others.
  4. Maximize your Health Savings Account (HSA) contributions. The individual contribution rate is $3,400 and the family contribution rate is $6,750 for 2017.
  5. Keep track of your additional sales tax on home additions and car purchases. If you have made large ticket purchases during the year, you may be able to get an additional deduction on your tax return.

OTHER PLANNING OPPORTUNITIES:

These strategies don’t necessarily result in a deduction, but they do provide tax-free or tax-deferred savings options.

  1. Maximize IRA contributions. Even if the contributions aren’t deductible, the growth would be tax-deferred.
  2. Consider a backdoor Roth IRA. If your income is too high to directly fund a Roth IRA, you still may be able to contribute through a backdoor Roth IRA.
  3. Fund your child’s Roth IRA. If they have earned income, you can fund a Roth IRA up to their earned income or $5,500, whichever is less. This is a great way to save money on a tax-free basis and start your children on a long-term investment plan.

With any investment plan, having a long-term financial plan that encompasses a tax-efficient approach is the best method. Sticking to that financial plan is then your next best move.

 

Bill Schultheis
As the author of The Coffeehouse Investor, Bill Schultheis is also a Financial Advisor and Co-founder of Soundmark Wealth Management.

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