As the calendar ticks down to the end of 2017, it’s time to take measure of your financial status, your goal-tending, and the tax hit you might be facing. The tax filing deadline next year is April 17, but another important date is December 29—the drop-dead deadline for making most moves that could affect what you’ll end up paying the tax man and how you go forward in 2018.
Have you done enough to save in tax-deductible vehicles like 401(k) and IRA contributions? Do you have stock losses that could offset heavy gains elsewhere in your portfolio? What about saving for a child’s education or charitable giving?
Here’s a handy guide to help you cover your bases before we ring the bell on a new year.
1. Make retirement contributions. Employee deferrals to a 401(k) or 403(b) are generally done on a calendar year basis since your contributions would show up on the W2 you receive. Personal contributions (Traditional or Roth IRA) can be made for a previous tax year up until the tax filing deadline – not including extensions. For 2017, you can contribute up to $18,000 into a 401(k), 403(b), or other like employee retirement. If you haven’t reached that, you can ask your employer to bump up your contributions before the year is out, or you can use the proceeds from a periodic or year-end bonus to help you get there. If you’re older than 50, you can potentially add an extra $6,000 catch-up amount for a total of $24,000. Remember, these can lower your taxes by the amount of your contribution, because they’re subtracted from your income. (Of course, you’ll pay taxes on them when you begin withdrawing them.) Please make sure to speak with your tax consultant about your personal circumstance.
2. Add to your traditional IRA. Traditional IRA limits are at $5,500 if you’re under 50; $6,500 if you’re older. The same rules apply for taxes at withdrawal. Remember, too, that the deductions may be limited if you or your spouse is covered by a workplace retirement plan. You may also be able to contribute to a Roth IRA, which is taxed up front, but when you take distributions in retirement, you don't pay taxes on that money. The annual contribution limit is spread across all of your IRAs, so if you have more than one account, the sum total may not exceed that $5500/$6500 mark. The deadline for 2017 IRA and Roth contributions is April 17, 2018.
3. Harvest stock losses. This was a big year for sizable gains in the stock markets, but there were still some laggards out there that may have missed the 2017 record-breaking parties. If you’ve got some of those stocks, bonds, or mutual funds in your portfolio, consider using those losses to offset some gains or to lower your taxable ordinary income (the limit is $3,000 annually) as a tax-reduction plan. There’s a strategy to tax-loss harvesting that calls for complete records of your cost basis to help offset like gains from like losses, and it’s not without risks. Short-term gains face higher taxes than long-term gains, and the IRS has a wash-sale rule that can cloud tax-harvesting plans. You may want to find a tax attorney to help.
4. Review contract status. It can be a good time to clean out the closets, so to speak. Take note of your status on things like options contracts, short positions, or a wash sale. If you choose to close a short position, for example, that deadline is December 27, because you need the two-day period to settle the account.
5. Save for a rainy day. There’s never a bad time to put money aside for what unpleasant events life might toss your way. Got a year-end bonus? Sock it away for a jump on a six- to nine-month emergency fund. You’ll thank yourself later.
6. Make a charitable donation. This, too, can help in the tax-reduction department, but there are rules that must be met for the IRS to consider your generosity deductible. The contributions must be made to what the IRS deems as “qualified organizations,” and the record-keeping has to be precise. Contributions to individuals are never deductible, and that includes donations to crowdfunding sites like GoFundMe. Besides writing out checks, consider donating appreciated stock to charity. The fair-market value of the stock at the time of the contribution is deductible, allowing you to potentially sidestep the capital-gains taxes.
7. Add to kids’ education plans. Contributions to education savings plans like a 529 are not tax deductible, but withdrawals are not subject to federal tax—and generally not state tax—when used for qualified higher education-related education expenses. Remember, there are child and dependent care tax credits available, plus education expenses and lifetime-learning tax credits.
8. Pay down high-interest debts. This shouldn’t be a surprise, but high interest rates on credit cards, car loans, mortgages, student loans, or any other kind of debt can eat away disposable income quickly. It’s always better to pay credit cards off every month to avoid interest rates charges—average credit card rates range from 15.3% to nearly 21%. A 21% annual percentage rate on a balance of $10,000, would cost about $175 just in interest if only the minimum is paid. But because interest compounds, payments can rise even as the balance is reduced. Many auto, home, and school loans allow you to add to the monthly principal, after paying the interest, to speed up the paydown of the loan.
9. Readdress investment goals. There’s nothing like starting off the new year on good financial footing. Consider taking another look-see at your short- and long-term investment goals, your overall contributions, and portfolio allocations to make sure you’re still on track. Remember, too, to make sure your beneficiaries are exactly who you want them to be. Happy New Year.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
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