Taxes are about dollar amounts and dates. April 15 obviously is the biggie. But Dec. 31 is almost as important.
The end of a tax year is, for the most part, the last time you can make tax moves that could help lower your coming tax bill.
With the days rapidly dwindling (the countdown clock over there in the ol' blog's right column is tracking them), here are a dozen tax things to think about and, if they apply to you, to take action on by Dec. 31.
1. Use your medical FSA balance
OK, this is one of those areas where you might have some extra time. Traditionally, flexible spending accounts designated to cover medical costs have expired at the end of the company's benefits year. For more workplaces, that the end of the calendar year. Some companies have offered a grace period until the following March 15 to spend up the prior year's FSA money. Others are now allowing employees with FSAs to roll up to $500 of unused account funds into the next year's account balance. But if your boss demands you use or lose your FSA money by year's end, start looking at ways to spend it now.
2. Add to your retirement accounts
OK, this is another of those areas where you might have some extra time. You can contribute to an IRA, either traditional or Roth, by the filing deadline next year. And if you have a self-employment retirement plan, you might be able to push that deadline until any filing extension you get.
If you contribute to your workplace's 401(k) or similar account, your payroll contributions are limited to the calendar year. But you still have time if you act quickly to add a bit more to this year's 401(k) balance; just talk to your benefits administrator ASAP. And remember, deadlines notwithstanding, the sooner you contribute to any retirement account, the sooner your money starts earning and compounding.
3. Rebalance your portfolio
If you have investments beyond retirement accounts, look at them now. You need to ensure that your assets are still doing what you want. If not, change them. This rebalancing can include cashing in on some stocks that have done well, selling some that haven't performed as you had hoped or even giving away some assets to your favorite charity.
You'll owe capital gains tax on the profits you take, but at a lower rate they your pay on ordinary income. And this capital gains harvesting also will let your reset your basis so that future year tax bills will be lower.
As for those losers, you can use the losses to reduce your capital gains.
4. Take or donate your RMD
If you're age 70½ or older and facing a required minimum distribution, or RMD, don't forget to take it. Failure to take these annual withdrawals from your tax-deferred accounts will produce a hefty tax penalty. You can always take the money out of your 401(k) and/or traditional IRA and if you don't need it right now, simply put it into a taxable account. That way Uncle Sam gets his cut that he's been waiting so long for and you get to let it keep earning, albeit now in an immediately taxable account.
Or you can directly transfer up to $100,000 of your RMD to your favorite charity. You won't get a tax deduction, but you also won't owe tax on the rolled over RMD.
5. Donate to charity the old-fashioned way
You also can donate to charity in the traditional way, such as by check, credit card, household goods and clothing. Or you can, as mentioned earlier, give appreciated stock. Or donate a vehicle. Whatever way you choose to give to your favorite nonprofit, remember to do so by Dec. 31 in order to claim the itemized deduction for this tax year.
6. Make other tax-fee gifts
Lots of folks agree that charity begins at home. So does the Internal Revenue Service. The tax code allows anyone to give gifts up to a certain limit to anyone they wish without any tax ramifications. This is known as the gift exclusion, and for 2016 it's $14,000. Because inflation's been low, it remains at that amount for 2017.
Yes, this generally is used by rich folks as a way to reduce their eventual taxable estate. But anyone can give financial gifts tax free. And you don't have to just give them to family. You can bestow the thousands on anyone you want. (If you need my address, just leave a note in the comments below!). Just make sure you do so by end of the year so that you don't waste this year's gift exclusion amount.
7. Pay state taxes
For many taxpayers, state and local taxes are among their most valuable federal tax deductions. If you own a home, this includes property taxes. Here in Central Texas, our real estate tax bill is not due to the county tax collector until the end of January, but we usually pay all or part of it before year's end to get the deduction on our taxes.
The same tax deduction strategy applies to folks in the 43 states with income taxes. If you're making state estimated tax payments and your budget can cover the final payment this ta year instead of, in most cases, the following January due date, you'll shift that deduction into the 2016 tax year.
8. Take advantage of your home's taxes
In addition to the property tax break afforded by homeownership, your residence provides a variety of tax breaks. A major one is the writing off of interest on your home loan. As the end of the year approaches, the same early payment option for property taxes also applies to your deductible mortgage interest. Make your January mortgage payment by Dec. 31 and deduct that interest on your coming tax return.
9. Bunch other itemized deductions
Taxpayers who itemize know there are many ways on Schedule A to reduce adjusted gross income, or AGI, to a lower taxable income level. But in several instances, deductions must be more than a certain threshold amount or they're useless.
Medical and dental expenses, for example, cannot be deducted unless, for most filers, they exceed 10 percent of your AGI. (Note that the 2016 tax year is the last one that the 7.5 percent AGI medical threshold still applies to taxpayers age 65 or older.) Miscellaneous expenses, which include business expense claims and job search expenses, must be more than 2 percent of AGI for filers of all ages.
Start looking now at these possibility deduction expenses now and bunch them into this tax year to ensure that you clear the threshold hurdles.
10. Pay college costs early
The spring semester's bill isn't due until January, and while I can totally understand how you want to push payment of that big bill as far into the future as you can, it might be smarter form a tax standpoint to pay it earlier. By doing so, you can claim the American Opportunity Tax Credit on this year's tax return. The tax credit allows you to count not only education expenses made during the current tax year, but also those paid toward classes that begin in the first three months of the next year.
11. Weatherproof your home
Officially, this is the last tax year that the energy efficient home improvement tax credit is available. It might be extended again for future years, but with the new administration taking over in January, all tax bets are off right now. So if you need to make some energy-related upgrades to your residence, you might be eligible for a tax credit of up to $500.
12. Adjust your withholding
Did you write the U.S. Treasury a big check this last filing season? Or did Uncle Sam send you a huge refund? Neither is a particularly good financial or tax move. Your goal should be to have your payroll withholding to be as close as possible to your eventual tax bill. You can do that by changing the amount that comes out of your paychecks.
Accurate payroll withholding is particularly important this tax year, since in 2017 the IRS is required by law to hold any refunds that are connected to the Earned Income Tax Credit or additional child tax credit. Refunds that are due folks who claim either of these tax breaks will not go out until Feb. 15.
If you're one of these taxpayers facing a wait for a refund next year, adjust your payroll withholding amount for these last paychecks of the year to get that money now.
I know things are about to get hectic with the holidays, but if any of these 12 possible year-end tax moves apply to you, take a look at them now and take advantage of them by Dec. 31.