7 Key Tax Moves to Make Before Year End

With Congress debating sweeping new tax legislation, you might be tempted to make some financial decisions before the end of the year in anticipation of major changes to the tax code, such as deciding to sell stock or real estate.

The House and Senate have their own versions, which differ on key provisions that GOP leadership eventually will need to resolve. But both proposals would make major changes in your taxes for 2018, including eliminating some itemized deductions, increasing the standard deduction, and altering tax brackets.

Except for a mortgage interest deduction cap in the House bill that would be retroactive for this year, all new income tax provisions would not take effect until 2018, according to the latest information released by lawmakers.

It’s important to remember these are still just proposals, and it would be risky to base a major part of your tax planning on what might happen, says financial planner Jim Holtzman of Legend Financial Advisors in Pittsburgh.

Your best strategy is to focus on your tax planning under the current rules. There are opportunities to reduce your tax bill and improve your finances for 2017, whatever Congress does. And there’s still time. Here are seven key moves to consider before the year end.

1. Max out your tax-sheltered savings plans. Most people aren’t contributing enough to max out their 401(k)s, or even to get their full matching contribution. Only 10 percent reached the $18,000 limit for 2016, Vanguard data show, and only 12 percent of eligible workers took advantage of the $6,000 catch-up contribution permitted for those who are at least 50 during 2017.

There’s still time to boost your savings and trim your taxes for 2017. Just click on your plan’s website, or make a call to boost your contribution level. If you’re contributing pretax money, the ding to your paycheck may be smaller than you think, because you’ll pay less in taxes. (Try this calculator to see the impact of stepped-up 401(k) contributions on your take-home pay.)

If you don’t have a 401(k), or if you have extra cash to put away, opt for an IRA—you can save up to $5,500 in 2017 (up to $6,500 for those 50 and older.) Those who want immediate tax savings can opt for a traditional, or pretax, IRA. But consider diversifying some of your savings into a Roth IRA—you contribute after-tax dollars, but your earnings and withdrawals are tax-free.

If you’re using a Health Savings Account (HSA), make sure it’s fully funded. For 2017 the limits are $3,400 for an individual, $6,750 for a family, plus another $1,000 in catch-up contributions for those 55 and older. With HSAs, you get a triple tax benefit—your contributions are made pretax, earnings are tax-free, and withdrawals are also tax-free, if the money is used for qualified medical expenses.

2. Review your withholding. Take a look at the amounts withheld from your paycheck to guard against an unexpectedly large tax bill next year. Among the taxpayers who might find themselves falling short: those who started pension or Social Security payments; those who sold a large amount of assets with gains; those with a second job; and those who owe estimated taxes (and may have missed a payment).

To check if you are setting aside the right amount, use the withholding calculator on the IRS website. There’s still time to adjust your withholding allowance—give your employer an updated Form W-4.

For those who owe estimated taxes, payroll withholding is treated as payments made throughout the year. So if you arrange to have enough additional tax withheld toward the end of the year, you can avoid estimated tax penalty, says Mary Deshong-Kinkelaar, a financial planner in Ohio.

3. Harvest your taxable losses and gains. If investments in your portfolio have taken a hit, there’s a silver lining. You can deduct those losses up to the amount of your capital gains, plus $3,000.

“With the market up so much this year, many people may not have losses,” says Holtzman. “But some sectors, such as commodities, have done poorly, so it makes sense to take advantage of those losses if you have them.”

If your losses exceed the annual limit, you can roll that excess amount over to claim against gains or earned income in future years.

For those who are in the 10 percent and 15 percent ordinary income tax brackets for 2017, you have a window of opportunity to save on taxes. That’s because you’re likely to be eligible for a zero tax rate on investments with long-term capital gains (assets held for more than year), rather than the typical 15 percent rate.

In 2017, to qualify for a 15 percent or lower bracket, individual filers must have taxable income below $37,950; $75,900 for married couples filing jointly. Many recent retirees, as well as those temporarily out of work, may end up in these lower brackets.

“A low bracket gives you an opportunity to efficiently sell investments with a gain, and that may be a smart move given the long market climb,” says Jeff Levine, a CPA and director of financial planning at Blue Print Alliance in Garden City, N.Y.

One strategy is to sell a low-cost-basis long-term investment, thereby realizing the zero-tax capital gain. You could then buy it back, locking in a higher cost basis and lowering future taxes. But be cautious: Taking a lot of capital gains could push you into a higher tax bracket.

4. Bunch up your medical deductions. Many itemized deductions, including the break on medical expenses, may be repealed under the House tax proposal. Only about 6 percent of tax filers claim this break, which requires that medical expenses exceed 10 percent of adjusted gross income—and only costs above that threshold can be deducted. But for those that take this write-off, it’s an essential tax savings.

If you’re close to meeting the medical deduction threshold, try to accelerate some of your expenses before year-end, says Mark Luscombe, principal analyst for tax and accounting firm Wolturs Klower. Perhaps you can schedule tests or procedures, or purchase medically necessary equipment, such as hearing aids or a chairlift.

5. Give generously to charity. Because fewer tax filers would itemize under the GOP proposals, most would not be able to claim the charitable giving deduction. So if you want to give—and get a tax break for your giving—step up your charitable donations this year, says Luscombe.

One tax-smart way to give is to donate highly appreciated stock. Just transfer the ownership of the stock to the charity—many brokerages have a simple charitable gift transfer form that allows you to do this. Check with your charity for specific instructions. The deduction, if you’re eligible for one, will be based on the market price of the stock you donate, but you won’t have to pay capital taxes on its appreciation.

You can also put money and appreciated investments in a donor-advised fund, which lets you take an itemized deduction (if you qualify) for the full amount you transfer this year. But you have the choice of spreading out your donations to the charities you designate in future years. You can set up a donor-advised fund through investment firms such as Vanguard, Schwab and Fidelity.

If you’re 70½ or older, you have yet another giving option—donate directly to a charity through your IRA, says Deshong-Kinkelaar. You won’t get a deduction, but you will reduce the tax bite on required withdrawals from your qualified accounts; more on that below.

6. Take your required distributions. Once you reach age 70½, you generally must begin taking required minimum withdrawals (RMDs) from your 401(k)s, IRAs, and other qualified accounts. These amounts are taxed as ordinary income.

You must take your RMD before Dec. 31, otherwise you will be hit with a costly penalty—half of the amount you were supposed to take, but didn’t, plus the tax you owe.

There’s an exception: For those turning 70½ and taking their initial RMD, you have a grace period until April 1 of the following year to make your withdrawal. But if you wait, you will have to make two withdrawals in that same year.

To figure out the amount of your RMD, check out calculators offered by fund companies such as T. Rowe Price and Schwab. FINRA, the financial services regulator, offers one as well.

7. Get a deduction for tax-planning help. For taxpayers, one of the most useful itemized deductions is the write off for tax planning and investment advice. This break can include fees for your accountant or financial planner, as well as the cost for computer programs such as TurboTax or H&R Block Tax Software.

This itemized deduction for tax planning help, like most others, may disappear under the proposed tax plans. (The House plan would retain the deduction for investment advice.) So if you haven’t turned to an expert for tax help before, this may be the year to do it—even if you can’t get a

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