7 Late Moves To Cut Tax This Year
As the days left in the year dwindle to a precious few, there's still time to implement tax-saving strategies. Here are seven possibilities to consider:
1. Harvest capital gains or losses. If you have prior gains from securities sales, you might now sell other investments at a loss to offset those gains—and up to $3,000 of ordinary income. Or you could realize gains now to be absorbed by losses you've already taken. Profits on securities you've held at least a year that aren't offset by losses will be subject to the maximum long-term capital gain rate of 15% (20% if you're in the top tax ordinary income bracket).
2. Boost 401(k) contributions. Adding to your 401(k) plan increases your nest egg for retirement while likely reducing your current tax bill. For 2016, you can defer up to $18,000 of pre-tax salary to a 401(k) ($24,000 if you're age 50 or older). One way to find that money: Use payroll tax savings that you get when you clear the Social Security wage base of $118,500.
3. Pay next semester's tuition. Parents normally can claim one of two higher education credits or a tuition deduction for students in college. But each tax break is phased out based on your modified adjusted gross income (MAGI). If you're under the MAGI limit, consider paying the spring semester's tuition in December—because the tuition deduction is scheduled to expire after 2016.
4. Give more to charity. One fast way to reduce your taxable income at year-end is to donate money to a qualified charitable organization. If you keep the proper records, you generally can deduct the full amount of the donation on your 2016 return. This includes contributions charged to a credit card late in the year even if you don't pay off the charge until 2017.
5. Accelerate tax payments. Prepaying state and local taxes that are due on January 1, 2017, could increase your deduction for those taxes for 2016. This is a common strategy for reducing the current year's tax bill, but you'll need to do it again in subsequent years to avoid inflating future taxes.
6. Go to the doctor or dentist. Medical and dental expenses are deductible only to the extent that they exceed 10% of your adjusted gross income (7.5% if you're age 65 or older). If you're at or near that threshold for 2016, you could schedule non-emergency visits, such as physical exams and routine dental cleanings, to take advantage of this deduction.
7. Support an elderly relative. You generally can claim a dependency exemption for an elderly relative only if you provide more than half of the person's support for the year and his or her taxable income doesn't exceed the personal exemption amount of $4,050. If it makes sense, chip in a little extra support this year to clear the half-support mark.
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