5 Ways to Reduce Your Personal Taxes Before the End of 2016
Soon, we will be closing the books on 2016 and flipping the calendar over to 2017. All that’s left to do is a little holiday shopping, buying a couple of bottles of bubbly and … scrounging up some significant tax deductions?
OK, that last item is decidedly not fun … but it will be far more beneficial to you in the year ahead than new socks and the New Year’s resolutions you’ll abandoned by February.
Sound fiscal management should be practiced year round, but the end of the year offers a number of opportunities to cut down on your personal taxes. We’ve already highlighted several ways to prepare your business for tax season – now it’s time to lighten your personal tax burden.
5 Ways to Reduce Your Personal Taxes
1. Donate to Charity: This is one of the most common, obvious and well-advertised ways to score tax deductions by the end of the year. A number of charitable organizations put their efforts into overdrive to capitalize on holiday goodwill providing no shortage of options. And that’s good, because with a few exceptions, you can deduct up to 50 percent of adjusted gross income.
But because this deduction is so well-known, you need to know about a few provisos and red flags.
For instance, you can deduct charitable deductions, but only if you itemize your deductions – you can’t use this if you take the standard deduction. You also should insist on proof of donation (a receipt) for any donation, no matter how small, in case of an audit.
You can donate to a number of qualified organizations – not just charities. For instance, churches and other religious organizations, volunteer fire departments, nonprofit cemetery companies and more fall under the umbrella of permissible groups. But if you do want to donate specifically to a charity, remember that not all charities are equal. In fact, some less scrupulous organizations use names similar to legitimate nonprofits to bank on their good name. So if you are donating before the end of the year, check out charity rating services, such as Charity Navigator or CharityWatch, to make sure your money is properly spent.
2. Contribute to Your IRA: If you have extra cash hanging around, don’t spring on a last-minute big-ticket present. Put some money toward your future instead. IRA contributions are deductible up to various amounts depending on income and whether you and/or your spouse are covered at work.
For instance, if you’re married filing jointly, and your modified AGI is $98,000 or less, you can fully deduct an IRA contribution up to your IRA contribution limit, which for 2016 is $5,500, or $6,500 for those age 50 or older.
This applies to regular IRAs. Roth IRA contributions are not deductible.
3. Lovable Losers: When you invest, the goal is to rack up capital gains – basically, profiting by selling investments for more than the price you bought them. However, sometimes you need to give up on failing investments, and when you do that, you take a capital loss.
That said, capital losses aren’t a total … well, loss.
You can deduct up to $3,000 each year in capital losses, whether that’s on stocks held in a brokerage, or an investment property, such as lakefront rental house. So, let’s say you’ve made $2,000 in capital gains so far this year, but you have stock that has floundered that you could sell for a total $5,000 loss. You could absorb that red ink for a total $3,000 net loss, which would be fully tax-deductible. Better yet, if you absorb more than that, you can actually carry what’s left over after $3,000 in deductions forward into the next year.
4. Remember to Flex: Many companies offer flexible spending accounts, which essentially allows you to use pre-tax dollars to pay for various medical and childcare expenses. For 2016, people were allowed to use up to $2,550 in wages to their FSAs.
This isn’t exactly a “savings” guideline – this is more a “don’t waste your money” reminder. If you have any money left in your flex account, remember: If you don’t use it, you lose it. If you can fit in any last-minute check-ups, fill a prescription early – anything – do so to use as much of your FSA as possible.
If you find that you’re sitting with a few hundred dollars left in your FSA, either monitor your use of the FSA more closely next year, or consider contributing less.
5. Meet Your Deduction Thresholds: Some categories of deduction actually require you to hit a certain spend limit before you can deduct them.
For instance, most employees know they can deduct certain business expenses, such as travel and local transportation costs. However, you can only deduct these and a number of other expenses – that are all grouped as “miscellaneous expenses” – if they exceed 2% of AGI. Look back through 2016 and see if there are certain business expenses you could deduct that you might have missed. You can even deduct costs for a hobby if you make a little money from that activity.
The same goes for medical and dental expenses, which have a threshold of 10% of AGI, or 7.5% if you or your spouse is 65 or older.
It’s Not Too Late – Talk to the Tax Experts Today!
You don’t want to guess on any of these or other year-end tax breaks. If you rush to try to fit any of these in, you could find yourself making mistakes now that lead to audits later.
So the best way to save big on taxes before the end of the year is to talk to the experts at McManamon & Co., which offers a host of tax services for individuals, business, estates and trusts. We can help guide you through the various rules designed to give you a break before the end of the season, and we can get you in position for 2017 so you’re not sprinting to tax savings at the eleventh hour.
Don’t leave money on the table in 2016. Give the tax experts at McManamon & Co. a call at 440.892.8900 or contact us online today!
Tags: McManamon & Co., personal taxes, taxes | Posted in accounting, McManamon & Co., taxes