Tax season is just around the corner, and individuals are starting to consider last-minute ways to decrease their tax burden for 2017. While you should be considering tax and estate planning throughout the year, there are some end-of-the-year actions you can take to help decrease your tax owed or increase your refund. You may also want to consider making some changes in 2018 to help with your tax burden and asset protection for years to come.
Defer Income Until 2017
Even if you have already earned most of the income that you are planning on for 2017, you can still make some quick adjustments to decrease your tax burden for 2017. Deferring income is one of the best ways to decrease your tax burden, but it only pushes those potential tax burdens to 2018, so be cautious not to overdo it.
For those working as employees, you may want to talk to your employer about deferring income. For example, if you are due an end-of-the-year bonus or holiday bonus, talk to your employer about moving the timing of the bonus too after the new year. The more you can push to next year, the less you will have to pay this year. While deferring income only delays payment, it can give you time to save up for the extra tax obligations if necessary.
If you have a Limited Liability Company, corporation, or other business, you may also be able to increase your tax savings even more. Sometimes you can speak with your clients or customers about delaying payment until January as well. Some customers may not want to wait to pay you until the new year because those expenses paid to you decrease their tax burden as well. You can avoid this potential conflict by simply waiting until January to send outstanding bills.
Businesses may be able to prepay expenses as a way to decrease their tax burden. Regular expenses are perhaps the easiest types of expense to prepay. Consider prepaying things like rent, utility bills, regular maintenance expenses, or predictable inventory purchases. Keep in mind, however, that the more you pay in 2017, the less you will be able to deduct from your profits in 2018. If you make significant overpayments, that can increase your tax burden in 2018.
If you know that you will have a large expense coming up at the beginning of the year, consider making it at the end of the year instead. You can also stock up on supplies that you may need for 2018 and make other bulk purchases. If you have been considering purchasing equipment for your business, it may be beneficial to do that at the end of the year as well.
In addition, taking care of maintenance needs at the end of the year can help cut down on taxes as well. If you have been putting off maintenance, take care of it before December 31 to decrease your tax burden for your business. Maintenance is an easy way to cut down on taxes because you likely would have spent that money later anyway.
For individuals, you may want to prepay expenses that you can deduct from your income. Mortgage payments are the best example of this type of expense. You know that you will have to pay your January mortgage, so why not prepay it and increase your deductible expenses for 2017? Child care expenses may also fall into this category.
For individuals, medical expenses are similar to maintenance expenses for businesses. If you have been putting off a trip to the dentist or the eye doctor, the end of the year may be a perfect time to schedule an appointment. Keep in mind, however, that your medical expenses only “count” as an itemized expense if they are more than 10 percent of your adjusted gross income (AGI) or 7.5 percent of your AGI if you are 65 years of age or older. If the extra medical expense will put you over the required minimum, then it is definitely worth doing.
Make Retirement Contributions
Individuals who are looking for quick ways to decrease taxes at the end of the year can make sure that they are contributing the full amount to their IRA. Traditional IRA contributions are tax-deductible in the year that you make them, up to a certain level that varies depending on your income and tax filing status. For most individuals, you will be able to contribute up to $5,500 in 2017 to your IRA. Those who are over the age of 50 will be able to contribute an additional $1,000 as a “catch-up” amount.
Those who have 401(k) accounts can also contribute and decrease their tax burden as well. You can contribute up to $18,000 to a 401(k) plan for 2017, which can result in significant tax savings. Like contributing to an IRA, the actual effect will vary depending on your tax bracket and related income. For example, for someone in the 25 percent tax bracket, you may be able to save up to $4,500 in taxes just for contributing the full amount to your 401(k).
Retirement contributions can also be valid for 2016 even if you make them in 2017. You just have to contribute the amount before tax filing day, which is typically April 15 for individual filers. This is an added bonus because many other tax-saving strategies must be in effect as of December 31.
Self-employed individuals may also be able to fund a Simplified Employee Pension (SEP) as well. A SEP is basically an IRA for self-employed individuals and those who own businesses, and contributions are also tax-deductible. The maximum that you can contribute will vary depending on your self-employment income. The maximum is 25 percent of your compensation each year or $53,000 for 2016, whichever is less. If your business does not have a SEP account for yourself or for your employees, you may want to consider establishing one as a tax savings mechanism for 2017.
Incur Capital Losses
Many people do not like the idea of incurring losses at all, but capital losses can be a good way to decrease your tax burden as either a business or an individual. If you have a stock or other asset that you know will eventually be sold at a loss, you can sell it before the end of the year to take advantage of the loss’s effect on your income.
Keep in mind, however, that many capital losses will only offset capital gains, so this may only be a good strategy if you know you have significant upcoming capital gains on which you will owe taxes. The IRS does allow a $3,000 “spillover” if you have more capital losses than gains that you can take from your ordinary income, however.
Be careful to avoid a “wash sale,” which would undermine this tax-saving strategy. Awash sale occurs when you buy back substantially the same asset as you sold within 30 days before or after taking a tax loss. This restriction prevents selling and repurchasing assets only for the related tax advantages.
Make Charitable Contributions and Donations Before December 31
Charitable giving has tax advantages for both individuals and businesses. Make sure that you get your giving in before the end of the year to help increase your tax deductions. The holidays are a great time to give to a tax-exempt charitable organization of your choice.
There are limits on charitable giving, but they are generally not an issue for most taxpayers. Individuals are limited to giving 50 percent of their adjusted gross income for the tax year.
Keep in mind that donations do not have to be monetary. They can include unwanted clothing, furniture, and other household goods. The value of these items is determined by their value at the time of the donation for tax purposes, not the price you paid when you initially acquired the item.
No matter how you donate, be sure to keep records of your donations, including receipts, canceled checks, or correspondence from the charity itemizing your giving.
Getting Ready for 2017
If you own your own business, you may want to consider making the transition to a corporate structure or LLC for 2018. Both of these business structures offer asset protection planning that often cannot be replicated through other means. It may also result in tax savings because of the way that these entities are taxed and how they can account for expenses and other deductions.
Corporations and LLCs also offer added advantages beyond asset protection as well. For example, they are a valuable estate planning device because they can easily be transferred to others either when you are ready to retire or at your passing.
Individuals and businesses can often use these tips without any extra help from CPAs or tax planning professionals. You can find out more about these asset protection and tax and estate planning tools by using our online video library. Sign up for a free membership.
These topics are hot button issues at our live events as well. Find a full listing of our live events here.