There are many steps consumers can take to potentially reduce their tax liabilities, increase deductions, or qualify for tax credits. The following are easy year-end steps that can be taken before December 31 to help increase tax breaks.
#1. Reevaluate your bad investments
Divesting losing investments before the end of the year is a strategy called tax-loss harvesting. This refers to selling off stocks, mutual funds, and other investments to realize losses. These losses can offset capital gains tax liabilities during the tax year dollar for dollar. If losses exceed gains, taxpayers can use up to $3,000 of excess losses to reduce ordinary taxable income with the additional carried over to the next tax year.1 Everyone’s situation is unique and it is important to consult with a tax professional to review your specific tax situation to determine if this strategy is right for you.
#2. Contribute to retirement accounts
Tax-deferred retirement accounts allow you to save and grow money pre-tax. Over time, retirement savings can grow substantially thanks to compound interest without taxation. The IRS limits how much can be contributed to tax-deferred accounts each year, which makes the end of the year the perfect time for final contributions if you have not yet met your contribution limit for that year.
Company-sponsored 401(k) plans offer one of the best deals as employers typically match contributions to some degree. For 2017, workers can contribute up to $18,000 per year, or $24,000 per year for workers at least 50 years old. IRAs could be another great option. Workers can make IRA contributions until April 17, 2018 for 2017 contributions. The maximum annual contribution for an IRA is $5,500 with an extra $1,000 for workers 50 and older.2 There are also other types of retirement plans to consider.
#3. Consider charitable giving
Taxpayers who itemize their returns can potentially reduce their tax liabilities by donating to charity. The tax benefit is generally high for those who donate securities like stocks that have appreciated in value and have been held for at least a year as this results in a tax deduction and eliminates the capital gains tax.
A receipt with a description of the item is necessary for all non-cash contributions that exceed $250. All donations for 2017 must be made by December 31. 3
#4. Pre-pay college expenses
Paying for next year’s college costs before December 31 may have tax benefits. Doing so allows taxpayers to claim the American Opportunity Tax Credit or the Lifetime Learning Credit, even if the student won’t start school until spring. These tax credits could be more valuable than deductions, but there are also deductions available for fees and tuition paid before December 31.4
Chris Scalese
Arielle O’Shea, Nerd Wallet, May 5, 2017, How to Trim Taxes, Keep More of Your Investments,, Access date: December 21, 2017.
Dayana Yochim, Nerd Wallet, June 29, 2016, Best Retirement Plans: Choose the Right Plan for You,, Access date: December 21, 2017.
Kelly Phillps Erb, Forbes, December 11, 2017, 13 Tips For Making Charitable Donation Tax-Deductible in 2017,, Access date: December 21, 2017.
Kay Bell, Nerd Wallet, November 25, 2017, How to Lower Your Tax Bill Before Year’s End,, Access date: December 21, 2017.
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