Be it from paycheck, investments or small business – irrespective of the source, everybody wants that their net worth goes up as it determines how much income your assets can generate at retirement. There are ample of things that can literally eat up your hard-earned dollars – for example, unexpected healthcare expenses, inflation and sudden car repairs. None of these are in your control. The one you can actually control is your taxes. You must think and properly chalk out avenues to curtail your tax bill well in advance.
Year-ending is imminent; the tax clock is ticking – but you still have a reasonable amount of time to take necessary action. You have to plan your own, individual and personalized tax strategies instead of following the crowd as your situation is likely not to be the same as others. Here are some tax tools that would help you make proper year-end tax planning and reduce tax bill.
The smartest move is to defer your income from 2016 to 2017 though it works in particular scenarios only. For example, if you belong to a high tax bracket this year and you’re planning to retire in 2017, it would be wisest to defer income into 2017 as it would allow you to be taxed at a lower tax bracket. And as the existing income tax system is quite progressive, you can enjoy significant savings.
You can cut down the rate from as high as 39.6% to as low as 10%. But you must take Medicare and Social Security taxes into consideration as they may get capped at 118,500 USD as of last year but would apply to the first income in 2017. Being a self-employed, if you pay both sides of Federal Insurance Contributions Act (FICA) and if you’ve maxed out on Social Security taxes, this may not work for you. However, if your income doesn’t go significantly low in 2017, it might work as it is expected that the new Trump governance would make income taxes lower across the board and if it is so, you can take advantage of this.
You can also defer income through your retirement plan like 401(k), SIMPLE IRA and 403(b). Divert your dollars from the paycheck into such accounts and taxes will get deferred on that amount. If you want to max out tax benefits, go for funding as much of the paycheck into such accounts as possible over the couple of pay periods left in this financial year. With some plans, you can divert even 100% of your paycheck amount. If you have plenty of cash in hand to pay the bills, this would be the cleverest choice.
2.Flexible Spending Accounts (FSA)
Employers fund FSAs to let the employees divert money from paychecks to certain fringe benefits like vision, child care and dental needs. Owning to special tax benefit, such plans are ‘use-it-or-lose-it’ according to IRS rules. Some companies have adopted a grace period as allowed by the IRS to permit the employees to use their money kept aside from 2016 as late as 15th March, 2017. But if not, make sure you have at least one last minute visit to your optometrist, dentist or drug store before the time is over.
Though sounds complex, tax-loss harvesting is actually easy. All you need to sell investments that have dropped in value to capture capital loss that you can later write off against the capital gains you’ve realized in 2016. To keep the portfolio asset allocation unchanged, you may need to consider purchasing a similar investment with the proceeds. Remember to read the wash-sale rules on IRS website carefully to make sure you make no mistake.
4.Required Minimum Distribution
If you’ve turned 70 ½ or older in last year and have an IRA, you may need to take a required minimum distribution from your account before the year ending. Failing to do so would penalize you steeply at 50%. So make sure you take care of such things before the time runs out.
Apart from the 4 tax strategies to adopt in 2017 to safeguard your retirement income, you may find some more on the web. To be in the safer side, you can get help from a tax specialist in your city for your tax filing.