Six Smart Year-End Tax-Saving Money Moves

The sun rises. The sun sets. After summer comes fall. These things we know, and we calmly accept. And then for some reason, every single year, after Halloween, we are “shocked” to find that we are hurtling towards December 31st.

Please take a breath and make a promise to yourself that next Saturday, you will steal two hours from your day to focus on something very important that will help you preserve your money before heading into 2018. Sit down and estimate your 2017 taxes.

Once December 31 passes, there is almost nothing you can do about your taxes. A little planning before year-end goes a long way.

If you project what your tax return will look like before the year ends, you may identify ways to do all of the following:

1. Harvest losses that reduce your tax bill, aka “capital losses”


December 31, 2017, is the deadline to “harvest” tax losses if you want to use them to reduce your 2017 tax bill. By harvest, we mean that you will sell investments that have decreased in value and use those losses to decrease your income tax bill. The equity market was pretty strong in 2017, so it’s more likely you will have gains rather than losses. However, individual-equity buyers may be able to identify some losses (as compared to mutual fund investors). If you’re smart, you can “harvest” them and use them to lower your tax bill. If there’s a capital loss, it will be used to offset any capital gains. That means if you have $5,000 of loss and $5,000 of gains they cancel each other out and no taxes are owed on the gains. If you have gains that are going to be taxed at the 0% capital gains rate anyway, then using losses to offset those gains doesn’t make sense. It’ll be a wash. But if you have no realized capital gains for the year, then up to $3,000 a year of capital loss can be used to offset ordinary income. A $3,000 capital loss, if used against ordinary income, is worth anywhere from $300 to $588 in reduced taxes.

(Note: If you already collect Social Security, a capital loss could be worth even more because lowering taxable income may also lower the amount of taxed Social Security benefits. For one low-income client, the $3,000 capital loss we generated last year lowered her federal tax bill by $720.)

2. Harvest gains that will be taxed at zero if you do so in 2017, aka “capital gains”


With tax gain harvesting, in contrast to tax loss harvesting, you sell investments after they have appreciated. For some taxpayers, gain harvesting can deliver an outstanding return. The deadline for tax gain harvesting is also December 31.

In 2017 married tax filers with taxable income up to $75,900 (singles up to $37,950) have a 0% tax rate on long-term capital gains and qualified dividends. If you are at the 0% capital gains rate now, or even the 15% capital gains rate but expect your income to be higher later, you’ll want to realize gains now at the lower rate. If you wait until a later tax year when your taxable income is higher, you’ll pay a higher tax rate on those gains.

Your taxable income includes the gain, so when you are checking to see if this strategy works, calculate your taxable income first without the gain, then you can see how much room you have to realize gains at the lower rate.

3. Convert IRA savings to a Roth IRA at a low tax rate


I’m a big fan of Roth IRAs because the balance grows tax-free and distributions are also not taxed. Once you reach age 70 ½, you will be required to take distributions from Traditional IRA accounts. Those distributions bump up your taxable income and could mean your capital gains and Social Security will be taxed at a higher rate.

Depending on your 2017 income, it could be a wise move to convert money into a Roth IRA. While you will have to pay taxes on this money when you convert it, no future taxable distributions are required and you may be able to permanently remain in the 0% capital gains and qualified dividend tax bracket. If you have a lot of assets in non-retirement brokerage accounts, this is just one of many ways converting to a Roth could pay off later.

Here’s a free online Roth calculator that can help you determine if a Roth IRA conversion is smart for you. This calculator (nor any online calculators that I can find) does not accurately illustrate the full value of Roth conversions as it doesn’t factor in the impact later on in retirement. Roth conversion planning is often far more beneficial to you than a free online calculator will indicate.

Traditional IRA to Roth IRA conversion must be taken by December 31, 2017 to count in 2017. Under existing tax laws you can convert, and early in the new year if you decide you converted too much you can “recharacterize” or “unconvert”. However, under the proposed new tax rules, this option would go away and no recharacterization would be allowed.

Related: 10 Ways to Wipe Out Your Retirement Savings

4. Give it away


For those over 70½, donating Required Minimum Distribution (RMD) assets from retirement accounts to charity could be a smart move. The Qualified Charitable Distributions (QCD) provision allows you to gift up to $100,000 directly from a Traditional IRA or Roth IRA to a charity without having to include the distribution in your taxable income. This also means IRA income doesn’t count towards other tax formulas such as the one that determines how much of your Social Security is taxable or if you will pay higher Medicare Part B premiums. If you’re going to gift or tithe anyway, why not do it from your IRA?

While you’re gifting, keep in mind you can also give up to $14,000 to anyone and it doesn’t use up your lifetime estate tax exemption amount. Between you and a spouse you could give $28,000 total to each child and/or grandchild. If you have a large estate (over $10 million for married, $5 million if single), gifting now could save a lot in estate taxes later.

5. Increase your 401(k) contribution or fund your HSA to reduce your tax bill


You can defer all of your last paycheck or two for the year into your 401(k) or other employer-sponsored plan such as a 403(b), or SIMPLE IRA. Here are the parameters to determine if this makes sense.

Let’s say you’re single and making a decent amount of money. You’ve put $15,000 into your 401(k) plan so far. You do your year-end tax planning and realize your income is such that you are right on the edge of the 28% tax bracket, with some income that will fall into the 33% tax bracket. That means any additional deductible contributions you make will save you taxes at the 33% federal rate. If you could get another $5,000 into your plan, it would save you $1,650 in federal taxes. In such a case it may be worth sacrificing the December paycheck (for now) and using other funds to get by for the month.

You can also see if you’re eligible to make an IRA contribution. And if financially feasible, fund your Health Savings Account to the maximum allowable amount. This money is never taxed if used for qualified health care expenses.

6. Deduct, if possible, healthcare expenses


You might be able to deduct out-of-pocket medical expenses from your taxes, but only if those costs exceeded 10% of your Adjusted Gross Income for the year (it used to be 7.5%). And you must itemize all deductions to take advantage of this benefit. Health insurance and Medicare premiums, premiums for long-term care insurance, nursing home costs, and orthodontics (as well as other costs) are all considered out-of-pocket medical expenses. These are costs, not just serious illness or injury, that may bump you into the AGI 10%+ category. Here’s a list of medical and dental expenses that can be deducted if your total medical expenses exceed 10% of your AGI.

(Please note that the new tax bill under review would eliminate this deduction).

Tactics: how to estimate taxes


To estimate your taxes, gather all the same information you would need to fill out your tax return. It’s easiest to take 2016’s return and write what you think this year’s numbers will be in the margins. Then, use an online 1040 tax calculator, put a sample scenario into tax preparation software or, of course, you can fill out a paper tax return.

Once you have your estimated tax return prepared, here are the key line items to look at:

  • Adjusted Gross Income (AGI) (line 37 on a 1040 Form, line 21 on a 1040A)
  • Taxable Income (line 43 on a 1040 Form, line 27 on a 1040 A)
  • The only way you can identify tax planning opportunities and uncover all the tax savings ideas listed above is to do this work before year-end. Don’t procrastinate. Call your tax professional or adviser, or get out the tax forms and onto the online tools. Or, even better, hire us, and we do all this for you!