Top 6 year-end tax tips

Year end is just around the corner. Make sure that you do not forget to check the following before we get into 2017. Some of these items are fairly straight forward and provide huge value for money.

401k contributions

401k contributions are payroll contributions and hence cannot wait till Jan 2017 (for the year 2016). If you have not maxed out your 401k contributions for 2016 and have the funds to do so, then now is the time.

It is a now or never situation. 401k contributions are tax deductible. If you are in the 25% tax bracket, then you save $250 on taxes right away for every $1,000 you contribute to your 401k.

In addition to the tax benefits, 401k plan offers other advantages too – for example, bankruptcy protection. 401k is protected by Bankruptcy laws. Attorneys cannot seize your 401k account to repay creditors.

Tax loss harvesting

You can deduct up to $3,000 capital losses from your other income. Check your stocks and sell the losers.

It is $3,000 in NET capital losses. Here is how the calculation works:

Example-1: Capital gains $2,000, Capital losses $3,000, net capital losses deducted form ordinary income $1,000

Example-2: Capital gains $2,000, Capital losses $5,000, net capital losses deducted form ordinary income $3,000

Example-3: Capital gains $2,000, Capital losses $6,000 -> net capital losses $4,000. Deduct $3,000 from form ordinary income in 2016 taxes and deduct $1,000 from the ordinary income in 2017 (carry forward $1,000 capital losses in excess of the $3,000 allowed limit per year).

Keep in mind the Wash Sale Rule though – you cannot buy the same or ‘substantially identical’ stock within the 30 days before or after the sale. So if you sell the losses on Dec 31st 2016, then you cannot buy a substantially identical stock in all of Dec 2016 and Jan 2017.

FSA account (insurance)

Some employers offer one of the two grace options: “grace period” of up to 2 ½ extra months to use the money in your FSA OR carry over up to $500 to use in the following year.

If your employer does not offer any of these options, then you will lose the money you have in there at year end. So you have to spend it soon.

You can buy things online up to midnight on Dec 31st. Eligible items include contact lens, sunscreens, and even condoms.

IRA/ Roth IRA

In general, sooner you make your IRA contributions the better it is. You can make IRA contributions for 2016 till the tax filing deadline (Apr 15, 2017… or Oct 15, 2017 with extensions).

But here is the catch: the IRA account should have been opened before Dec 31, 2016.

Yes, let me repeat: You can make IRA contributions for 2016 till the tax filing deadline well into 2017 BUT the IRA account should have been opened by Dec 31, 2016.

So make sure that you have an IRA account open – even if you are not able to contribute later, you do not lose anything.

IRA distributions

One of the extremely harsh penalties that exist in the Internal Revenue Code (IRC/ IRS code) is the failure to take Required Minimum Distributions (or RMDs).

You must start making regular minimum distributions from your traditional IRA after the age of 70 ½.

If you do not, then IRS charges you a penalty of 50% based on the amount that should have been withdrawn.

So if applicable to your situation, make that RMD distribution now. I would suggest not to wait till Dec 31st – sometimes the distribution itself might take a few days.

Property taxes

This is applicable to all property taxes but most significant in case of home owners.

In my county, you get a 4% discount on the annual property taxes if you pay them by November (3% if you pay by Dec, 2% by Jan, 1% by Feb, 0% by March, and you are delinquent if the taxes are not paid till April).

I just paid my property taxes last week and received a 4% discount.

In addition, I will be able to itemize these taxes on the Schedule A when I file my taxes.

4 thoughts on “Top 6 year-end tax tips

  1. Yes, let me repeat: You can make IRA contributions for 2016 till the tax filing deadline well into 2017 BUT the IRA account should have been opened by Dec 31, 2017— I think it is Dec 31,2016

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