It’s never too early to put tax planning at the top of your mind. As the end of the year approaches, it’s a good time to start thinking about your 2016 tax refund and how to maximize your deductions. Check out the following expert Year-End Tax Tips to help you stay informed and proactive, and get the most out of your 2016 refund:
Claim investment losses – If you had any realized investment losses this year, you can use those losses to offset your gains. If you sell a stock at a $2,000 profit and another stock at a $1,000 loss, then only the $1,000 in net investment profit is taxable. You can claim investment losses even if your losses exceed your gains or if you don't have any gains at all—reducing your taxable income by the amount of your losses. You are able to claim up to $3,000 worth of net investment losses in any given year.
Time your mutual fund buy-ins – Avoid buying into a mutual fund right before the fund pays out its annual dividends and capital gains, as the value of the shares drops by whatever the payout is to each investor, leaving you without a gain and also responsible for paying taxes on that payout. USA Today’s Selena Maranjian advises: “The smart move is to find out when, or if, the mutual fund will be making a significant distribution to shareholders—and to buy into the fund after that. These distributions often occur in December, and most major funds will publish the date of the distribution on their website.”
Adjust your tax withholding status – When the federal government withholds money you are due, that money doesn’t earn interest—which is like the government borrowing money from you for free. Use a tax withholding calculator to get an estimate of how much you might owe in federal taxes, including your tax liability for Social Security or Medicare. With that estimate, you can then make withholding adjustments to minimize what you owe, as well as minimize what the federal government can keep without paying you.
Make year-end charitable gifts – Making charitable gifts before the December 31 cut-off is another wise deduction. Check or cash gifts are relatively easy to give at the last minute, but be careful if you plan to give away appreciated stock as a gift, as it generally takes longer than a simple cash gift and will require some advance planning on your part.
Use your 401K – A great tax-reducing tool is your employer-sponsored 401K or similar retirement plan. You can contribute up to $18,000 of your salary in 2015 ($24,000 if you’re 50 or over). “If you contribute pre-tax contributions, then your taxable income would be reduced by the total amount of your contributions for the year,” explains USA Today’s Jason Hall. So if your tax rate is 25% this year and you made the max $18,000 contribution, you can reduce your federal income taxes by $4,500, or by $6,000 if you’re 50 and over and contributed the max $24,000.