Now that it’s December and the year is about to end, it’s time to consider making a few last-minute tax moves for 2016. Take advantage of the lull between Thanksgiving and Christmas to save some money.
These tips can save a considerable amount on your tax return. But, not every action recommended in this blog post will apply to everyone or every situation. Make the moves that make sense in your situation. If you need some help figuring which ones would help you best, let me know.
Maximize Education Tax Credits & deductions:
The American Opportunity Tax Credit, Lifetime Learning Credit, and, to a lesser extent, Tuition and Fees Deduction help take the bite out of college tuition. These credits and deductions are based on the amount of higher education expenses you paid in 2016. If you didn’t spend enough to qualify for the maximum credit or deduction in 2016, you can prepay the spring 2017 semester to help push yourself up to the limit.
Roth IRA conversions & Low income years:
When converting a traditional IRA into a Roth IRA, most (if not all) of the conversion is taxed. If you’ve been considering making a conversion and you had a low income year, this may be the time to convert. Lower income and the resulting lower tax rates provide a good opportunity for a conversion.
Required Minimum Distributions:
If you’re over 70.5, you’re required to take a distribution from your IRA or other qualified retirement plan before the end of the year. If you don’t take your distribution, there is a 50% penalty on the amount you were supposed to distribute. If you turned 70.5 in 2016, you have until April 1, 2017 to take the distribution.
Your required minimum distribution can be paid directly to a qualified charity. Charitable distributions aren’t taxable.
Paying Tax-deductible medical expenses:
The medical expense deduction can be difficult to qualify for. Taxpayers must first itemize and then have medical payments in excess of 10% of their AGI. If you’re near or already passed the 10% threshold, making as many medical payments as possible before the end of the year can save you big on your tax return.
Making Large Gifts:
Each year, you can give up to $14,000 per person to an unlimited number of people without worrying about the gift tax and, if you’re married, your spouse can give another $14,000 to the same individuals. This annual exemption can’t be carried over, so if you’re planning to make a large gift next year, take advantage of this year’s exemption along with next year’s.
These are basic strategies and explanations to save on your taxes at the end of the year and there may be additional factors involved in these credits and deductions. If you need help or have a question on any of these moves, please let me know.