PROPER DOCUMENTATION

 

Know the importance of proper documentation. Keeping adequate records is required by the IRS for employee business expenses, deductible travel, entertainment expenses, and charitable gifts. Neglecting to track these deductions can lead to overlooking them. You also need to maintain records regarding your income, including, large tax-free amounts such as a gift or inheritance.

 

MAX OUT YOUR 401(K) OR SIMILAR EMPLOYER PLAN

 

Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available. Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.

 

Tip: Some employers match a portion of employee contributions. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

 

IF YOU HAVE YOUR OWN BUSINESS, SET UP AND CONTRIBUTE TO A RETIREMENT PLAN

 

If you have your own business, consider setting up and contributing as much as possible to a retirement plan. These are even allowed for A sideline or moonlighting businesses. Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.

 

AVOID OR DEFER INCOME RECOGNITION

 

Deferring taxable income makes sense for two reasons. Most individuals are in a higher tax bracket in their working years than they are during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Additionally, through the use of tax-deferred retirement accounts you can actually invest the money you would have otherwise paid in taxes to increase the amount of your retirement fund.

 

Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

 

Tip: You can achieve the same effect of deferring income by accelerating deductions, for example, by paying a state estimated tax installment in December instead of the following January due date.

 

CONTRIBUTE OT AN IRA

 

If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA. You may also be able to contribute to a spousal IRA - even when the spouse has little or no earned income. All IRAs defer the taxation of IRA investment income and in some cases can be deductible or be withdrawn tax-free.

 

Tip: To get the most from IRA contributions, fund the IRA as early as possible in the year. Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA. Following these two rules will ensure you get the most tax-deferred earnings possible.

 

DEFER BONUSES OR OTHER EARNED INCOME

 

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year.

 

If you're self-employed, defer sending invoices or bills to clients or customers until after the new year begins. You can defer some of the tax that is subject to estimated tax requirements.

 

This may even save taxes if you are in a lower tax bracket in the following year. Note that the amount that is subject to social security or self-employment tax increases each year.

 

ACCELERATE CAPITAL LOSSES AND DEFER CAPITAL GAINS 

 

If you have investments on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

 

For most capital assets held more than 12 months (long-term capital gains) the maximum capital gains tax is 20 percent. However, make sure to consider the investment potential of the asset. It may be wise to hold or sell the asset to maximize the economic gain or minimize the economic loss.

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WATCH TRADING ACTIVITY IN YOUR PORTFOLIO

 

When your mutual fund manager sells stock at a gain, these gains pass through to you as realized taxable gains, even though you don't withdraw them. So you may prefer a fund with low turnover, assuming satisfactory investment management. Turnover isn't a tax consideration in tax-sheltered funds such as IRAs or 401(k)s. For growth stocks you invest in directly and hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

 

USE THE GIFT-TAX EXCLUSION TO SHIFT INCOME

 

You can give away $14,000 ($28,000 if joined by a spouse) per donee in 2017 (same as 2016), per year without paying federal gift tax. You can give $14,000 to as many donees as you like. The income on these transfers will then be taxed at the donee's tax rate, which is in many cases lower.

 

Note: Special rules apply to children under age 18. Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax.