Fall is the time to think of the leaves changinimages-3g, the weather turning cooler, and…taxes.  While the 2016 individual tax deadline is not until April 15th, there are things that you should consider now that are just as important than that dreaded deadline.  Individuals file their taxes on a cash basis, which means that most things need to be done before the end of the year.  Below are some simple items to consider before year-end:

  • Maximizing Your Retirement Contribution – While traditional IRA contributions and ROTH contributions can be made after April 15, 401K contributions must be made prior to December 31st. Check with your employer about increasing your contribution.  You can contribute up to $18,000 to your 401K plan for 2016.  If you are in the 25% tax bracket and contribute the maximum you will save $4,500 on federal income taxes.
  • Consider A Roth IRA Conversion – Roth IRAs grow tax free and are tax free when withdrawn for retirement. Traditional IRAs and other retirement plans are taxable when withdrawn. You must pay taxes on the amount converted as ordinary income.  Prior to doing this, one of the things that you should consider is whether the cost of paying the taxes now outweighs the benefit of income tax-free qualified distributions in the future.
  • Charitable Contributions – If an organization holds a special place in your heart and you are considering making a donation, be sure to do it prior to the end of the year to get the deduction in 2016. Fall is also a great time to do some purging of household items and clothing.  You are also able to get a deduction for non-cash contributions.  Make sure to get proper documentation for all contributions.
  • Bunching Itemized Deductions – If your real estate taxes are due in January, consider paying them in December. This way you will be able to deduct the January payment and the December payment in 2016.  This also works with paying your state and local tax liabilities prior to year- end, if you are not paying alternative minimum taxes.  Some itemized deductions are only deductible if they exceed a certain percentage of your adjusted gross income (AGI).  Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10% AGI floor.  This could mean moving a procedure into next year versus this year, or vice versa.  Miscellaneous itemized deductions have an AGI floor of 2%, consider bunching professional fees like legal advice and tax planning.
  • Managing Gains and Losses – If you have an investment that has lost its value, now might be a good time to sell. You are able to use that loss to offset other capital gains that you have.  Short term and long term losses must be used first to offset gains of the same type, but if your losses of one type exceed your gains in the same type, then you can apply the excess to the other type.  Remember though that you are only allowed up to $3,000 a year in capital losses to reduce ordinary income.
  • Accelerating Deductions – Businesses are able to take advantage of Section 179, meaning that they can depreciate a fixed asset in the year that it was purchased. If you are considering making a large investment in fixed assets, prior to the end of the year might be the time to do it.
  • Deferring Income – There are some income items that you may be able to control. Some items to consider are bonuses and retirement distributions.  The time value of money can make deferring tax almost as valuable as escaping it.