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The information below is for general information only and should be tailored to your specific situation. We would be happy to further elaborate and help you with your financial planning.
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.
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.
INVEST IN TREASURY SECURITIES
For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax. Also, investing in Treasury bills that mature in the next tax year results in a deferral of the tax until the next year.
KEEP TRACK OF MILEAGE DRIVEN FOR BUSINESS, MEDICAL, OR CHARITABLE PURPOSES
If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven. For 2017, it's 53.5 cents per mile for business, 17 cents for medical and moving purposes, and 14 cents for service for charitable organizations. You need to keep detailed daily records of the mileage driven for these purposes to substantiate the deduction.
CONSIDER TAX-EXEMPT MUNICIPAL BONDS
Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher paying commercial bonds after reduction for taxes.
Gain on sale of municipal bonds is taxable and loss is deductible. Tax-exempt interest is sometimes an element in the computation of other tax items. Interest on loans to buy or carry tax-exempts is non-deductible.
GIVE APPRECIATED ASSETS TO CHARITY
If you're planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash prevents you having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally, you can obtain a tax deduction for the fair market value of the property.
Tip: Many taxpayers also give depreciated assets to charity. Deduction is for fair market value; no loss deduction is allowed for depreciation in value of a personal asset. Depending on the item donated, there may be strict valuation rules and deduction limits.
TAKE ADVANTAGE OF YOUR EMPLOYER'S BENEFIT PLAN TO GET AN EFFECTIVE DEDUCTION FOR ITEMS INCLUDING MEDICAL EXPENSES
Medical and dental expenses are generally only deductible to the extent that they exceed 10 percent of your adjusted gross income (AGI). For most individuals, particularly those with high income, this eliminates the possibility for a deduction. You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan.
These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars. Another such arrangement is a Health Savings Account. Ask your employer if they provide either of these plans.
CHECK OUT SEPARATE FILING STATUS
Certain married couples may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:
• One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
• The spouses' incomes are about equal.
Separate filing may benefit such couples because the adjusted gross income "floors" for taking the listed deductions will be computed separately. On the other hand, some tax benefits are denied to couples filing separately. In some states, filing separately can also save a significant amount of state income taxes.
IF SELF-EMPLOYED, TAKE ADVANTAGE OF SPECIAL DEDUCTIONS
You may be able to expense up to $510,000 in 2017 for qualified equipment purchases for use in your business immediately instead of writing it off over many years. Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums as business expenses. You may also be able to establish a Keogh, SEP, or SIMPLE IRA plan, or a Health Savings Account, as mentioned above.
IF SELF-EMPLOYED, HIRE YOUR CHILD IN THE BUSINESS
If your child is under the age of 18, he or she is not subject to employment taxes from your unincorporated business (income taxes still apply).
This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if he or she in under the age of 8 years old.
TAKE OUT A HOME-EQUITY LOAN
Most consumer-related interest expense, such as from car loans or credit cards, is not deductible. Interest on a home equity loan, however, can be deductible. It may be advisable to take out a home-equity loan to pay off other non-deductible obligations.
BUNCH YOUR ITEMIZED DEDUCTIONS
Certain itemized deductions, such as medical or employment related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way you stand a better chance of getting a deduction.
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