Last Minute Ways to Cut Your Taxes
If you’d like to lower your tax burden for 2017, there is still time to pull this off, but you have to hurry. Here is a list of six actions that you can take before January 1, 2018.
1. Determine if you will take the standard deduction.
Some tax-cutting techniques are only available to Americans who itemize their tax return. The Internal Revenue Service estimates that 75% of Americans take the standard deduction.
2. Postpone income.
If you can defer some of your income or a bonus until early 2018, you won’t have to pay taxes on that money for another year. It could be easier to do that if you are a freelance worker or self-employed.
3. Contribute to charity.
If you itemize deductions on your tax return, you can capture a tax deduction by writing a check to a charity. While donations for 2017 must be made by December 31, if you make a donation with a credit card it will count even if you don’t pay the bill until 2018.
You can also pocket a tax deduction for in-kind services. Dropping off clothing and housewares, for instance, to a local charity constitutes an in-kind donation. If you make a non-cash donation over $250, you will need a receipt that includes a description of the items.
4. Donate appreciated assets.
You can get more benefit from your charitable donations if you give appreciated stock. Instead of selling stocks or mutual funds for a profit and owing taxes on the capital gains, you can donate the actual shares to a nonprofit and receive a charitable tax deduction.
5. Prepay deductible expenses.
Consider paying expenses that you’d normally pay in 2018 in December instead. If, for instance, you pay your January mortgage payment in December, you can claim it on your 2017 tax return.
6. Look for ways to offset capital gains.
Try to minimize the tax hit from any capital gains you captured for the year in your investment portfolio.
Short-term capital gains, which are generated by the sale of investments held for less than one year, will result in the biggest tax bill. That’s because these profits are taxed at your ordinary income tax rate, rather than at the capital gains rate.
In contrast, long-term capital gains are taxed at a lower rate depending on your income tax bracket. For instance, someone in the 39.6% tax bracket would pay far less (20%) on his/her long-term capital gains. Individuals in the 28% to 35% tax brackets would pay just 15%.
You may also sell one investment at a loss to offset the profit taken on another investment. There is no limit on the amount of capital losses that may be used to offset capital gains. In addition, if your capital losses exceed your capital gains in a given year, you may use up to $3,000 of capital losses to offset ordinary income (thus reducing your ordinary income tax liability) and carry forward the remaining capital losses indefinitely to be used against gains in future tax years.
What you shouldn’t do, however, is make investment decisions simply to avoid taxes without considering your overall long-term investment goals.