When it comes to your finances, being intentional in your actions will save you money. Thinking through decisions and having a strategy in place ensures that you are prepared for the future. One of the most effective ways to save is to adopt tax-wise financial practices. Every year, as the year end approaches, take the time to review your situation and take action to minimize your tax bill.
Here are 6 examples of how you can do that:
1 - Defer your income. Some self-employed individuals delay billings until late December to ensure that they won’t be paid until January. For employees, some firms will allow you to defer a year-end bonus until next year.
2 - Maximize your retirement plan contributions. Employer-based plans (ex. 401K, 403B, etc.) require contributions to be made by year end. However, IRA-based plans give you to April 15 to make contributions for 2016.
3 - Make charitable donations. Charitable donations must be submitted by year end to a qualified 501(c)3 tax exempt organization in order to count against your taxes.
4 - Realize losses to offset capital gains. If you have realized capital gains during the year, review your portfolio for losses that could be realized to offset those gains.
5 - Take the Required Minimum Distribution from your IRA. For those at least 70.5, the IRS requires you to take distributions from your traditional IRA and they tell you how much to take. You must do it by year end. It saves you in penalties because failure to do so can cost you as much as 50% of the amount under-withdrawn. This principle also applies to those of any age who have inherited IRAs.
6 - Review your flexible spending accounts. These accounts have a “use it or lose it” provision. If you have money in the account, either book a doctor’s appointment by year end, or at least by your plan’s grace period date. Many allow you until March 15 to spend the funds.
Tax collection happens every year so it is one of the things you can work into a regular schedule in order to maximize your savings and financial security. To learn more about these kinds of tactics talk to your financial advisor.