As we enter the fourth quarter of the year, it is time to start thinking about end of year tax-planning. Doing so now instead of waiting until the last-minute when things get hectic with holidays can help you save a chunk of change on this year’s taxes.
Here are some smart end of year tax tips:
Take Extra Deductions
If you itemize your deductions, then take some extra end of year tax deductions. These might include a charitable donation or paying a property tax bill that is due early next year.
Watch Out for the Alternative Minimum Tax (AMT)
The AMT was put into place to prevent the wealthy from using deductions to reduce their tax bill. These days, the AMT also affects middle class tax payers. Some deductions allowed under the IRS’ standard tax rules, including deducting state property taxes, are not allowed under AMT rules and can lead to a higher tax bill.
Defer Your Income
If you are self-employed and expect to be in the same or lower tax bracket next year, then defer this year’s income into next year by billing clients and customers at the end of December. This ensures that you will not receive payment until next year and reduces your tax bill for this year.
Deferring income is harder to do it you are a salaried employee, but if you expect to receive a year-end bonus, you can see if your employer will defer it until early next year.
Contribute the Maximum to Your Retirement Accounts
Contributions to your 401(k) plan lower your tax bill because they are subtracted from the wages on your W-2. The more money you can contribute to your 401(k), the lower your tax bill will be. In 2016, the most you can contribute is $18,000 (or $24,000 if you are age 50 or better).
If you do not have a 401(k), then consider opening a traditional IRA. You have until April 15th of next year to make tax-deductible contributions for the current year. In 2016, you can contribute up to $5,500 (or $6,500 if you are age 50 or better).
Talk to a Tax Planning Professional
Taxes are confusing. To ensure that you are on the right track with yours, contact us. We are experts in all matters of accounting, taxation and more.