Time for Year-end Planning

It’s that time of year again — when a little planning can potentially save you taxes when you file your return with the IRS next year. Here are some strategies to consider.

Prepay State and Local Taxes
The IRS generally will allow you to deduct any state income taxes paid during 2017 as an itemized deduction. If you would normally wait until January of next year to pay the fourth installment of estimated state income tax for 2017, consider paying it before the end of 2017. This will enable you to include the payment in your 2017 itemized deductions. Similarly, you might consider paying deductible real estate taxes before the end of 2017. Note, however, that these strategies will not be beneficial if you are subject to the alternative minimum tax (AMT).*

Save for Retirement
Another way to reduce your income tax bill is to contribute to a tax-favored retirement account — either through your employer’s retirement savings plan or an individual retirement account (IRA). For 2017, the IRS dollar limit on elective salary deferrals to 401(k), 403(b), and most 457 plans is $18,000, plus an additional $6,000 for those 50 and older. (Your employer’s plan may have additional limits.) Elective deferrals must be made before year-end.

Additionally, you may contribute up to $5,500 ($6,500 if you’re age 50 or older) to an IRA.** Contributions to traditional IRAs are generally deductible, though the deduction is phased out above certain income levels if you or your spouse is an active participant in a retirement plan at work. IRA contributions for 2017 may be made up until the due date (without extensions) for your 2017 return.

Contribute to an HSA
If you are covered by a high-deductible health plan and meet other requirements, you may make deductible contributions to your health savings account (HSA) at any time up until your income tax return due date (without extensions). Generally, for 2017, the limits are $3,400 for self-only coverage and $6,750 for family coverage. Individuals who are age 55 or older at year-end and not enrolled in Medicare may contribute an additional $1,000.

Capital Gains and Losses
If you incurred capital losses in 2017, you may want to consider selling appreciated stocks that you no longer want to hold so that you can offset the losses against the gains. Capital losses can be used to offset capital gains plus an additional $3,000 of ordinary income ($1,500 if married filing separately) annually. You may also carry forward unused capital losses to future tax years, subject to the same limitations.

Please contact us if you’d like to discuss tax planning strategies.

* At the time of publication, lawmakers are considering tax reform proposals that include potential repeal of the deduction for state and local taxes and the AMT, among other changes.
** The IRA contribution can’t exceed your (and your spouse’s) taxable compensation.