While most Americans only think about their taxes once every 12 months or so, smart tax planning is actually a year-round activity. With 2016 coming to a close, right now is actually a great time to consider taking a few actions that could dramatically lower your tax bill.
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Max out your retirement plans
One simple way to minimize your tax burden is to max out your contributions to tax-deferred retirement accounts, such as a 401(k), SEP IRA, or traditional IRA. Since these accounts are funded with pre-tax dollars, any contributions that are made will lower your total taxable income, thus decreasing your tax liability.
In 2016, the annual limit on 401(k) contributions is $18,000, or $24,000 for any worker age 50 or older. For the self-employed, the limits are even higher if you open up a SEP IRA. For 2016, contribution limits on these accounts are $53,000 per year, or 25% of total compensation, whichever is lower.
You could also score a tax break by contributing to a traditional IRA. For 2016, the contribution limit on these retirement accounts is $5,500, or $6,500 for anyone age 50 or older.
If you are not yet on pace to reach these maximums by year-end, and you can afford to contribute more, doing so will score you an immediate tax saving.
Top off contributions to a Health Savings Account
If you have a high-deductible health plan, then you likely have access to a
For 2016, the annual contribution limit for individuals is $3,350, and for families, it's $6,750. If you are age 55 or older, you can add an extra $1,000 to both of those figures. It's also important to keep in mind that any contributions made to this account are yours to keep forever, which stands in stark contrast to a
Clean out your closet
Plenty of Americans have all kinds of extra junk in their houses they no longer use. If you itemize your deductions, why not donate those unused items to charity and bank an immediate tax saving?
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How? Simply drop the items off at a registered charity and get an itemized receipt. Then, include the donated value on your list of deductions, and voila!
Cut ties with losing investments
If you bought an investment in a taxable account that has lost value, you could lighten your tax bill by selling it prior to the end of the year. If your total losses exceed your gains, the IRS will allow you to deduct up to $3,000 from your taxable income. Any losses above that figure can also be carried forward to offset your tax bill in future years, too.
On the flip side, if you've got a few big winners on your hand and are thinking about selling, it might make sense to wait until after January 1st to do so.
Make a donation
If you itemize your deductions, you can lower your tax burden by making a charitable contribution. Any direct donations made before December 31 can be used to reduce your taxable income.
It is also worth pointing out that donations do not have to be made with cash or a credit card, either. One great option is to directly donate any appreciated securities such as stocks or bonds to charity. Doing so will allow you to deduct the full value of the securities on the date of the transfer. Not only will you not have to pay capital gains taxes, but the charity won't either!
Don't pay more than you have to
This is by no means an exhaustive list, so start doing your research to see what other moves you can make today to lower your future tax bill. A few small adjustments here or there can really go a long way toward keeping the tax man out of your wallet.
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