There’s still time between now and New Year’s Eve to take the appropriate steps to reduce your tax bill and help your favorite charity. Year-end planning shouldn’t wait until New Year’s Eve because some strategies may take time to implement, making now the right time of year to review your finances. Here are some specific ideas to consider:
Contribute as much as possible to qualified retirement plans. You have until April 15 of next year to make IRA contributions of up to $5,500 (plus a $1,000 catch-up contribution for those ages 50 and older), but the earlier you contribute, the longer the funds have to grow tax-deferred. Take full advantage of an employer’s 401(k) plan. You can set aside up to $18,000, plus catch-up of $6,000.
Compare the deductions on last year’s income tax return with those you anticipate for this year. If you itemize and expect to be in the same tax bracket this year as next, consider accelerating some deductions from next year into this year. If you expect to be in a higher bracket next year, postponing some deductible expenses may save more taxes.
Review your investments. Check for the winners and losers in your portfolio. You can offset capital gains on the sale of appreciated assets by generating corresponding losses. A more satisfying option might be to transfer appreciated assets to charity. You’ll avoid any capital gains tax (generally 15% or 20%), and possibly the 3.8% net-investment income tax. In addition, you’ll be entitled to a deduction for the full value of shares owned more than one year, not just the price you originally paid.
Get to the mailbox. A check mailed to charity can be postmarked as late as December 31 and still qualify for a charitable gift this year, even though charity won’t receive the check until early next year. A gift by credit card made this year also entitles you to a deduction this year. Large charitable deductions may be especially attractive this year if you are recognizing income from the conversion of a traditional IRA to a Roth IRA. If you plan to make a gift of stock or mutual fund shares, start the process early to guarantee that a deduction is available for this year.