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Tax planning should be a year-long process, not just something you do for a few days at the end of the year and for a few days in April. With that in mind, with just a couple of months left in 2017, now is a smart time to start thinking about some year-end tax moves you can make.
Here’s why you may want to get rid of some of your losing investments, ask your employer to put more of your paycheck into your 401(k), and take full advantage of a popular deduction before the year comes to an end.
Sell some losing investments
If you have any investments, stocks or otherwise, that are worth significantly less than you paid for them, it could be a smart tax move to sell them before the end of the year. To be clear, I’m not saying that you should sell stocks you believe in for the long run simply because they’re down. Rather, I’m saying that if you’ve been considering selling a certain stock and redeploying your capital elsewhere, selling could help lower your tax bill.
The process is known as tax-loss harvesting. The IRS allows investment losses to offset any capital gains you have. Short-term losses must first be used to offset short-term gains, and long-term gains must first be used to offset long-term gains. If there are no like-kind gains to offset, investment losses can be used to offset any other capital gains, and up to $3,000 of your other income if you don’t have enough capital gains to offset. And any excess can be carried over to the following tax year.
Tax-loss harvesting, also known as tax-loss selling, could end up being especially smart this year with the potential for tax reform. While we don’t know the details of an eventual tax reform package at this point, it’s possible that your marginal tax rate will fall from its current level.
Boost your 401(k) contributions
Unlike an IRA, which allows you to contribute for the 2017 tax year all the way up to the April 2018 tax deadline, your elective paycheck contributions to a 401(k) generally must be made before the end of the year.
401(k) contributions, unless they are characterized as Roth 401(k) contributions, reduce your adjusted gross income (AGI). In other words, if you earn $80,000 and contribute $10,000 to your 401(k), your AGI will be reduced to $70,000, and that’s before any other tax breaks to which you’re entitled.
For the 2017 tax year, you can defer up to $18,000 of your compensation into your 401(k), with an additional $6,000 catch-up contribution allowed if you’re 50 or older. And to be perfectly clear, this doesn’t include any employer matching contributions — this is just how much you can choose to contribute.
Now, for most people it isn’t practical to contribute the legal maximum, but the point is that the 401(k) contribution limits are quite generous, so this is one tax break that could potentially save you thousands of dollars — if you act before the end of the year.
Make an extra mortgage payment
If you itemize deductions, you probably know that you can deduct the interest you pay on your home mortgage. What you may not be aware of is that you can write off the interest paid in the calendar year, not just the interest on your 12 scheduled payments.
Here’s the point. If by mid- to late-December you’ve already made your 12th mortgage payment of the year, you may be able to choose to make your January payment early and have 13 payments’ worth of interest to deduct.
This could be an especially smart strategy this year, given the uncertainty of tax reform. To be clear, the mortgage interest deduction isn’t on the chopping block — in fact, GOP leaders have specifically named the mortgage interest deduction as one that’s staying, along with the charitable-contribution deduction.
However, the GOP’s tax proposal calls for the standard deductions to increase dramatically, which would mean that many taxpayers who currently itemize would no longer need to. In other words, the mortgage deduction is staying, but depending on how big your deductions are, it may not be useful for you if tax reform passes. So you may as well take advantage of it as much as possible in 2017.
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