Planning improves any process, including your taxes. Understanding your needs and constraints helps you develop systems for achieving your goals in the upcoming year.
Tax planning is a multi-faceted endeavor that requires considering your filing status, investments, retirement plans, common deductions, purchases and expenditures, and the timing of your income.
If you’re interested in saving on your taxes, there a few steps you can take now:
- Maximize your contribution to retirement accounts. Increasing your contribution to your 401(k) 403(b), SIMPLE, SEP, or IRA could reduce your taxable income. You could also qualify for The Saver’s Tax Credit, a non-refundable tax credit given to eligible taxpayers who make a salary deferral contribution to an employer sponsored retirement account.
- Evaluate itemized deduction acceleration. This provides a way to reduce the amount of total tax owed by accelerating enough itemized deductions into the current year to make the subsequent year’s itemized deductions below the standard deduction, or vice versa. Charitable contributions and real estate taxes paid in 2016 could fall under this category.
- Be aware of the Alternative Minimum Tax. The alternative minimum tax is a supplemental income tax imposed by the United States federal government that is required in addition to baseline income tax for certain individuals, corporations, estates, and trusts that have exemptions or special circumstances allowing for lower payments of standard income tax. Although it was originally designed to ensure the wealthy could not use legal deduction to drive down their tax bill, it has increasingly effected the middle class.
- Check your investments for gains and potential losses. You can use up to $3,000 of excess capital losses to offset your ordinary income.
- Regular minimum distributions from your traditional IRA. This should be done by April 1st following the year in which you, or your spouse, reach seventy years and six months old. If you keep track, you can avoid a fifty percent excise tax on the amount you should have withdrawn based on your age, life expectancy, and the amount in the account.
The best way to ensure that you achieve maximum deductions is to set up a meeting with your CPA to discuss which savings you qualify for so that you can implement strategies specific to your needs.
It’s not too late for tax planning if you act before December 31st
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