Tax reform, particularly the uncertainty that remains as legislation continues to be debated, has led some to question what their future tax filings will look like. There are a number of simple strategies that can be useful for taxpayers now regardless of what finalized reform actualizes. In this article we’ll take a look at a few of these strategies to review before the year ends and before tax preparation begins.
Take advantage of retirement contributions
By maximizing your IRA and retirement plan contributions, it’s possible to reduce your tax bill. As previously discussed, now is a good time to check your 401(k) contributions over the year; the maximum employee contribution is $18,000 a year (and $24,000 for employees aged 50 or older). This number will rise in 2018 by $500. In addition to 401(k) accounts, you can contribute a maximum of $5,500 ($6,500 for those 50 or older) to your traditional and Roth IRA. Keep in mind that IRAs offer a bit more flexibility because contributions made up until April 17, 2018 will count toward the 2017 tax year.
Defer or accelerate income if possible (and necessary)
Deferring income can be a favorable strategy for people who have significant reason to believe that their tax rate will be lower in 2018. While it’s not realistic for everyone to have the ability to delay income, it may be possible for some, especially for the self-employed, to put off some of those year-end payments coming in by invoicing late in the year. TurboTax notes that income can also be deferred by taking capital gains in 2018 rather than 2017. As income can sometimes be deferred, it can also be accelerated if it’s likely that you will be paying a higher tax rate in 2018.
Review your flexible spending accounts
Some companies offer their employees flexible spending accounts (FSA), allowing employees to allocate a portion of their pay to these accounts to cover child care and medical expenses. The money that goes into these accounts are exempt from income and Social Security taxes, but any money left in there at the end of the year is surrendered. If money has accumulated, use what is available before the year ends to take care qualified expenses, if possible. If a significant amount has amassed beyond expenses for the year, it may be a good idea to review your contribution amount for next year. You can also check with your employer to determine if there is a grace period, which TurboTax notes is a period granted by the IRS allowing employees to spend FSA money saved in 2017 up until March 15, 2018.
Obtain customized guidance
These strategies are common and easy to follow, but everyone’s financial situations are unique and this can mean that more comprehensive analysis might be necessary. Discussing significant changes and circumstances specific to your tax year can be valuable in ensuring that your tax filings benefit you the most. At New England Investment and Retirement Group, we recommend that you maintain dialogue with your trusted estate and financial planners so that you have a plan that fulfills your needs and wishes for the present and future.