During the holidays, your tax bill is probably the last thing on your mind. But giving it some thought might be a good idea. The decisions you make now can determine how much you owe Uncle Sam in April. If you can squeeze in some free time between your holiday shopping trips and end-of-year parties, here are five steps you can take to lessen your tax bite.
Estimate your income tax burden.
1. Make an Extra Mortgage Payment
One of the most valuable tax breaks that homeowners can claim is the mortgage interest deduction. Deductions reduce your taxable income, which can come in handy if you’re trying to work your way down to a lower tax bracket.
If you have extra money, consider making another mortgage payment on top of your regular payment for the month. Just keep in mind that in order to take advantage of the mortgage interest deduction, you’ll need to itemize instead of taking the standard deduction.
2. Give Back
Charitable donations are another deductible expense that can lower your tax bill. The IRS allows you to deduct donations equal to up to 50% of your adjusted gross income. Again, you’ll need to itemize in order to claim the deduction and there are a couple of rules you’ll need to keep in mind.
First, the donation has to be made to an eligible tax-exempt organization. Giving $100 to your broke younger brother is nice but it won’t count for tax purposes. Second, you’ll need to have documentation proving that you made a donation. For example, if you’re donating money to a local animal shelter, you’ll need a receipt showing the name of the recipient, the date the donation was made and the amount of the contribution.
Related Article: What Can You Deduct at Tax Time?
3. Top off Your Retirement Accounts
Making contributions to a qualified retirement plan (such as a 401(k) or IRA) can help you at tax time in a few different ways. First, contributions to a 401(k) are deducted from your taxable income for the year. The more money you can funnel into your employer’s plan, the less income you’ll have that’s subject to tax.
If you’re saving in a traditional IRA, you may be able to deduct all of the money you contribute for the year, depending on your income level and whether you have an employer-sponsored retirement plan. For 2016, the annual contribution limit is $5,500 or $6,500 if you’re at least 50 years old. Some low-income savers can also score a tax break in the form of the Saver’s Credit.
4. Consider Deferring Some of Your Income
Getting a year-end bonus or commission can provide you with some much-needed cash after the holidays. But that can raise your taxable income for the year.
Deferring some of your income until the beginning of the new year may be helpful if you’re on the verge of being pushed into a higher tax bracket. That’s particularly true this year, considering President-elect Trump’s plan to consolidate marginal tax rates.
Related Article: 5 Financial Loose Ends to Tie Up Before the New Year
5. Harvest Investment Losses
If you like to play the market, you may have to pay a capital gains tax. You owe taxes on capital gains whenever you profit from selling an investment. Assets held longer than one year may be subject to a top tax rate of 20%. If you sell an investment that you’ve owned for less than a year, gains are taxed as ordinary income.
One way to offset gains is to sell off assets that have declined in value over the last year. The IRS allows you to deduct up to $3,000 in net losses each year. So if your portfolio contains some winners and some losers, you can even things out through tax-loss harvesting.
December will be over before you know it so you’ll need to act fast if you want to cash in on these money-saving tax breaks. While you’re at it, you might want to take time to organize your pay stubs and receipts in order to make the tax-filing process as smooth as possible.
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