A financial adviser shares 5 smart things to do before the end of the year to save money on your taxes
To help you get organized and provide an opportunity for potential breaks before the New Year begins, try these simple tips.
1. Maximize your retirement plan contributions
When it comes to your employer sponsored savings plan, like a 401(k), consider increasing your contributions to the maximum amount allowed before the year comes to a close. In 2016, the limit for individuals under 50 years old is $18,000. The limit is $24,000 for those 50 or over.
If you're not able to contribute this amount, try saving at least the maximum total that your employer might offer through its matching program. Taking this simple action could provide a great opportunity for extra savings.
As an added bonus, because 401(k) plans are funded with pretax dollars, the money from your gross pay that is put into these accounts lowers your taxable income. So, making the most out of your contributions could not only help boost your savings for retirement, but also help to reduce your tax liability.
Don't have an employer sponsored plan? Don't worry. The same approach can apply to an Individual Retirement Account (IRA). Unlike a 401(k) savings plan, you're not up against a year-end deadline with an IRA, as contributions can be made until April 17, 2017.
The sooner you are able to fund your account, the greater potential it could have to grow tax-deferred until that date. You can contribute a maximum of $5,500 to an IRA in 2016 — plus an extra $1,000 if you are 50 or older. This might be a good way to put any holiday bonuses to use and help grow your retirement savings.
2. Review all your deductions
The standard total tax deduction for 2016 is $6,300 for single filers and $12,600 if you are a married couple. However, if you think your total deductions for the year will exceed these amounts, you may want to consider increasing your deductible expenses while there is still time this year. This might include paying any medical or property tax bills ahead of time, even if they are not due until 2017.
3. 'Tis the season for charitable giving
One approach is to consider donating to your favorite charity as a way to help maximize your taxable deductions. Not only does this help others, but it can also provide you with a valuable tax benefit. If you choose to donate with the intent of gaining a tax deduction, make sure the organization qualifies as a charity in the eyes of the IRS.
The IRS offers a current list of eligible organizations, so be sure to check if your favorite charity qualifies. To make sure you understand your options, it's best to consult with a tax professional.
4. Consider an extra mortgage payment
Many homeowners might not know that there is also a simple action you can take to help maximize the deductions on your upcoming return before the year comes to a close.
How does this work? Most monthly mortgages are paid off at the end of your payment cycle. This means your Jan. 1 mortgage statement will represent interest for the month of December and, therefore, make it eligible for a tax break in 2016.
If you are able to claim this extra deduction, accelerate your January payment to arrive to your mortgage lender before the close of the year. Doing this can help you claim a larger mortgage-interest deduction on your federal tax return helping to reduce your overall tax bill.
5. Don't go it alone
Understanding your tax strategy is not easy, and most people will have questions along the way. The most important thing to remember is to get professional help when you need it. Now is the time of year when many people will start to evaluate their financial situation, so it is also a great opportunity to talk with your tax, legal, and financial advisors to discuss your current and long-term strategies.
While the busyness of the holiday season might make it especially hard to think about these opportunities, it's important to consider proper tax strategies as part of your retirement planning approach. After all, smart tax planning today can help you prepare for greater financial flexibility tomorrow.
Marilyn Timbers is a financial adviser and Investment Advisor representative of Voya Financial Advisors, Inc. Marilyn is a Certified Financial Planner™ practitioner. She also serves on the Women Advisors Network Board at Voya Financial Advisors.