It’s the time of year that we all dread…no, I’m not talking about the holidays! It’s time to start thinking about next years’ tax bill. I know April 15 seems like it’s ages away, and taxes are the last thing you want to think about while sipping egg nog and planning NYE parties. However, there are some very easy things you can do to lower your tax bill, but they have to be done before the end of year. There are plenty of others ways to help your taxes, but below are three simple things you can do now that can have a major effect.
- Give: Giving is always a good idea for the reasons we all know. And obviously you don’t want to give just for the tax benefits….however, there is that added bonus of reducing your taxes! Another added bonus – you can finally clean out your closets (which you’ve been planning to do all year anyway). You can donate clothes, furniture, toys and other items before year end for a tax deduction. The amount you can deduct depends on the fair market value of the item (which is basically what you would sell it for at a thrift store). Deductible expenses reduce your taxable income, lowering your tax bill. Donations to qualified charities are also considered tax deductible expenses. Keep in mind that not everyone can deduct their charitable contributions. You must itemize your tax deductions to claim any charitable donation – which you would only want to do if the total of your itemized deductions are greater than the amount of the standard deduction you would receive based on your filing status.
- Sell low: Although “buy high / sell low” shouldn’t be an overall investment strategy, you can lower your taxes for next year by selling investments now that are less than what you paid for them originally. You can then use those losses to offset any taxable gains you had during the year. If your losses are more than your gains, you can use up to $3,000 of excess loss to reduce other income. If you have more than $3,000 in excess loss, it can be carried over to the next year. Making lemonade out of lemons.
- Contribute to your retirement: Ideally you are contributing to your retirement throughout the year, but there is never a better time than at the end of year when you are trying to reduce taxes. Try to contribute the maximum allowed to your retirement. Those deductible contributions reduce your taxable income for the year.
- 401(k): If you have a 401(k), try to reach the max of $18,500 for 2018 ($24,500 if you are 50 or over). If you can’t contribute that much, put in whatever you can – especially if your employer matches.
- IRA: You can contribute a maximum of $5,500 to an IRA for 2018, plus an extra $1,000 if you are 50 or older.
- Self-employed: If you are self employed, you have several options for a retirement plan. If you don’t already have one, you can open a SEP or a Keogh. There are pros and cons to both, and it depends on your business – but contributing to either one will reduce your taxes. More details on the two plans here.