Last-Minute Ways to Reduce Taxes
If you’re thinking about taxes at the last minute, you may still have options to reduce your taxable income.
Ways to Reduce Taxes by December 31
Contribute to a qualified retirement plan.
You have until the end of the calendar year to make contributions to a qualified retirement plan, such as a 401(k). If you want to contribute the extra funds via your paycheck or if you want to allocate your year-end bonus to the plan, contact your HR department several weeks in advance. It may need at least one or two pay periods to process the added contribution for this calendar year.
Contribute to a 529 college savings plan.
In Pennsylvania and many other states, including Maryland and New York, you can deduct the cost of 529 contributions from state taxes, up to $14,000 per beneficiary each year. For married couples the deduction limit is $28,000 per beneficiary annually, provided each spouse earns at least $14,000 per year.
Donate to your favorite charity.
If you itemize your tax return, you can make charitable donations before the end of the calendar year to reduce taxes. Make sure the IRS recognizes the organization as a nonprofit and keep the donation receipt in case you get audited.
Make January’s mortgage payment in December.
Take advantage of the mortgage interest deduction by making the January payment in December. This strategy allows you to count January’s interest toward the current tax year. Keep in mind, though, that for the next tax year, you’ll only be able to deduct 11 months of interest.
Take capital losses on investments.
You can take a capital loss to reduce gains accrued throughout the year. If you have more losses than gains, you can use up to $3,000 in capital losses to offset ordinary income. Losses over $3,000 can be carried over to the following year to offset income or future capital gains. Talk with a financial professional for more details about harvesting losses.
Invest in your business.
Certain costly equipment purchases may be fully deductible. For example, you might be able to purchase a new laptop and save tax dollars, too. If your business generated a profit and has equipment needs, the section 179 deduction makes sense.
Ways to Reduce Taxes by Tax Day
Don’t despair if December 31 has come and gone. You still have options to reduce taxable income for the previous year, right up to tax day.
Max out IRA contributions.
Unlike a 401(k), you can make contributions to IRAs until tax day and count them toward the previous year’s taxes. If you don’t have access to an employee-sponsored retirement plan, you can contribute up to $5,500 ($6,500 if you’re 50 or older) to an IRA during tax year 2017.
Self-employed and freelance professionals might also consider maxing out contributions to a Simplified Employee Pension (SEP). You have until tax day to contribute up to the maximum, which is 25 percent of compensation or $54,000 for the 2017 tax year.
Contribute to your HSA.
If you have a high-deductible health insurance plan, you may be eligible for a Health Savings Account (HSA). These accounts allow you to make tax-free contributions to a fund intended to pay for qualified medical expenses. You have until tax day to make HSA contributions that count toward the previous tax year. For tax year 2017, the maximum annual HSA contribution is $3,400 ($6,750 for a family).
You may have looked at ways to reduce taxes at the last minute this year—but that doesn’t mean you can’t take control of your taxes now for next year. Simon Lever provides clients with year-round tax planning and consulting. Start a conversation with a Simon Lever tax professional today.