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10 Smart Financial Year-End Moves

By Vitaly on December 18, 2017 Leave a Comment

With just under two weeks left in 2017, there is still enough time to reflect on the year, evaluate your financial situation, and be sure that you are off to a good start in 2018.

Let’s take a look at 10 smart financial moves you can still do in 2017 that will reduce your tax liability and save you money.

1. Max out your 401(k) plan

The contribution limit for 2017 is $18,000, plus an additional $6,000 for individuals older than age 50. All contributions to your traditional 401(k) plan are tax deductible, meaning a lower tax bill. In addition to that, be sure to get the maximum match from your employer. You don’t want to leave that money on the table.

2. Max out your Traditional IRA

As with a 401 (k) plan, contributions to a Traditional IRA are tax deductible. The maximum contribution limit for 2017 is $5,500, plus an additional $1,000 for individuals age 50 or older.

3. Set up a 529 account for your kids

A 529 account has an annual contribution limit of either $14,000 per year or $70,000 for a lump-sum contribution that will cover a 5-year period (technically, there is no contribution limit for a 529 account, but if you contribute above $14,000, it will trigger a negative gift tax consequences). There are no deductions on your federal tax income for contributions to a 529 plan. However, depending on which state sponsors the plan, you may be able to deduct contributions to a 529 plan on your state tax income.

4. Max out your health Flexible Spending Account (FSA)

You can reduce your taxes by an additional $2,600 in 2017 if the health plan through your job allows for an FSA. Contributions to an FSA are made on a pre-tax basis, thus they are not included in your income. One catch with FSAs is that you can lose your money if it’s not spent within the plan year. If you find yourself in a situation with an unspent balance, double check if your employer offers a grace period of up to 2.5 extra months to use the money. Alternatively, your employer may have an option allowing you to carry over up to $500 to use in the following year. Either way, spend as much money as you can or risk the money being forfeited by the employer.5

5. Contribute to a Health Savings Account (HSA)

To be able to contribute to an HSA, you must be enrolled in a High Deductible Health Plan. All contributions to an HSA are tax deductible and have relatively high limits. For example, in 2017, contribution limits are $3,400 per individual, plus an additional $1,000 for individuals age 55 or older. In some cases, you can even contribute to both an FSA and an HSA in one year.

6. Avoid buying mutual funds at the end of the year in your taxable accounts

By law, mutual funds are required to pass profits from its operation back to investors. All distributions usually happen at the end of fourth quarter and as a result, bad timing can generate an unwanted tax liability. Before you purchase shares of a mutual fund, make sure that all of the profits have already been paid out. Another thing that could help you decide which mutual fund to purchase is the turnover ratio. The higher the turnover ratio, the more transactions a mutual fund does (buys and sells stocks or bonds) which passes more profits on to you. In general, you are better off with a mutual fund that has a low turnover ratio.

7. Take your losses

If you have a taxable brokerage account and some of your stocks’ or bonds’ positions are under water, it may be smart to realize losses on those positions and minimize your capital gains tax base. Up to $3,000 of realized capital losses can be used to decrease your ordinary income. If you incur more than $3,000 in losses, the excess can be used to offset capital gains in future years.

8. Hold on to your gains

At the end of the year you may be tempted to pocket some of the profit you have and spend it on your family. While the desire is great, the tax consequences of such actions can frustrate your efforts. To minimize your tax liability, make sure that you can offset your gains with your losses. This can only be done if your losses exceed your gains. If so, there won’t be any tax base. However, if your gains exceed your losses you need to understand the classification of your gains. Are they short-term (holding period of less than one year) or long-term (holding period of longer than one year)? Short-term gains are taxed at your ordinary income rates (up to 39.6% tax rate). Long-term gains are taxed at either 0%, 15%, or 20% (depending on your income). If possible, postpone taking profits on short-term positions into next year when the tax classification changes to long-term.

9. Donate to charity

If you haven’t done so, now is the best time. Support a cause you care about by making a gift before year end and get a tax break. However, be smart with how you do it. For example, if you want to donate cash by selling appreciated stocks, don’t do that. You will have to pay capital gain taxes. A better way is to donate stocks directly.

10. Defer your income

Whether you are a small business owner who expects to be paid for a job done at the end of the year or an employee expecting a year-end bonus, defer this income into next year if possible. This would reduce your 2017 tax base and can even prevent you from being pushed into a higher tax bracket.

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About Vitaly

I am a retirement plan adviser at Lestna Retirement. I help retirement plan sponsors to lessen fiduciary and administrative responsibilities, align retirement plan offerings with their goals, and customize it to the benefits of all employees. Learn More…

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