It’s not even 2017 yet, let alone April. But your future self will thank you if you start putting some thought into your taxes now.
Taxes due in April are based on how much you earn in 2016, so anything you can do to lower your taxable income for the year will mean less to pay Uncle Sam. That doesn’t mean asking your boss for a pay cut (indeed, here’s how to get a raise), but rather thinking about ways to cut that taxable income before the year is out – perhaps by making last-minute retirement plan contributions or charitable donations.
To see what tax bracket you are in, check your annual income against this table of 2016 tax brackets.
The goal is to maximize your tax deductions – basically, the amount of your income that doesn’t get taxed. You can opt to take a standard deduction ($6,300 for single filers or $12,600 for married ones), but you can cut your tax bill by more if you’ve had more than $6,300 in eligible expenses over the year (if you’re single) or $12,600 (if you’re married).
The way to capture all these breaks is to itemize deductions. That means you list all of your eligible expenses with the goal of reducing your taxable income by more than the standard $6,300/$12,600 amounts. This strategy doesn’t make sense for everyone, but things like state and local income taxes can be itemized, which could work in your favor. Even if you don’t itemize, there are ways to bring down how much of your salary gets taxed.
Here are some end-of-year tax strategies to consider:
• Sales tax: Shopaholics, rejoice! If you made a lot of purchases in the past year, consider taking a sales-tax deduction. This makes sense for people who are itemizing and who’ve also paid more in sales taxes than they did in state and local income taxes. Start collecting receipts, because you’ll need them as proof. Doing so is a pain, but if you’ve paid for a number of big-ticket items, like cars, wedding venues, or giant TVs, it could be worth your while.
• Charity: When it comes to giving back, many young adults prefer to work hands-on for a cause rather than open a checkbook. But if you’ve donated to a nonprofit this year, you can itemize these on your tax filings. And since you have some time left in the year, consider giving more, either directly or on behalf of someone else as a holiday gift. “To make a charitable contribution by year end, you might consider putting it on a credit card,” says Nate Smith, a director at CBIZ MHM, an accounting firm. “That would allow it to be counted as of the date that you made the charge.” Then you can pay your credit-card bill once you get your next paycheck.
• Mortgage interest: If you itemize, you can deduct things like mortgage interest and property taxes. This can add up to big bucks and will help offset the costs of homeownership. “Millennials have a lot of life changes that help them get more in deductions,” says Greene-Lewis.
• Moving: Whether you’re a renter or a homeowner, if you moved for work, you might be able to deduct your moving expenses from your income. Moving a few dozen blocks downtown isn’t going to cut it, though. “The new principal place of work must be at least 50 miles farther from the former residence than was the former place of work,” says Smith. Make sure you have your receipts. If you’re eligible for this deduction, you don’t need to itemize to get it.
• Student-loan interest: You can lower your taxable income by claiming up to $2,500 of student-loan interest deductions, even if you take the standard deduction.
• Retirement savings: If you have an individual retirement account, you can contribute – and take a deduction – for up to $5,500 for 2016. To take full advantage of this, you must not be eligible to participant in a workplace retirement plan, such as a 401(k), says Smith. The good news: You actually have until April 18 – the 2016 filing deadline – to make contributions for 2016, and you don’t need to itemize to take this deduction. If you have a 401(k), you can contribute up to $18,000. This reduces your income, plus you don’t have to do anything special when you file your taxes to make sure you’re rewarded. Your W2 forms will reflect it.
• Investments: Ordinarily, you’ll have to pay taxes when you sell an asset, be it a stock or a piece of real estate you’ve invested in, that has appreciated in value. There’s a 0% capital-gains rate on a long-term holding – one you’ve held for more than a year – as long as your income is under $37,650 (if you’re single) or $75,300 (if you’re filing jointly). It may be worth it to hold off selling until the following year to avoid higher short-term capital-gains rates. But don’t hold off selling assets just because rates may be lower under a Trump administration. “We don’t know what will happen with Trump,” Greene-Lewis says. “I would encourage people to go ahead and file like they normally would.”
Originally Posted on Barrons.