Merry tax planning! Check these 5 things off your list before December 31

By Ryan Fair

December is always a flurry of activity. Preparing for the holidays (and fitting in all those holiday parties) can be a challenge for all of us. If you’re like most people, the last thing you want to be thinking about as New Year’s Eve approaches is planning your taxes. Of course, as a tax specialist, that is precisely what consumes most of my time in December. For better or worse, it’s the time of year not only for “decking the halls,” but also for taking wise steps to reduce your tax bill come April 15.

To keep it simple (and be sure you have time to finish wrapping those gifts before Christmas Eve!), here are 5 things to tackle before December 31. Check these 5 things off your list and you’ll be just as prepared for Uncle Sam as you are for that guy in the big red suit!

• Capture your capital gains.
  2017 was a phenomenal year for the stock market, and investors have a lot to celebrate. If you were lucky enough to ride the rising stock market this year, review your portfolio to see if you should capture any capital gains before year-end. Because long-term capital gains are taxed at a lower rate than ordinary income, you may be able to pay as little as 0% federal capital gains tax by selling off some of your biggest winners before December 31.
   
• Fully fund your Health Savings Account (HSA).
  A Health Savings Account is a great tool that allows you to save for medical expenses with pre-tax dollars, grow your money with no capital gains or other investment taxes, and then spend it on qualified medical expenses tax-free down the road. That makes it particularly important (and valuable) to take full advantage of this no-tax savings opportunity by maxing out your contributions every year. Review your 2017 contributions to be sure you’ve reached the annual maximum: $6,750 per family, plus an additional $1,000 “catch-up” contribution if you are 55 or older. If you haven’t hit that magic number, use any available funds to make up the difference, and then deduct your total contribution on the front page of your 1040 to lower your taxable income. This is a great deal, and it’s much easier—and more advantageous—than deducting your medical expenses on Schedule A of your tax return.
   
• Make smart year-end charitable contributions.
  If you’re planning to give to charity this year, good for you! Do, however, be sure you’re making every dollar count by taking advantage of the tax code. If you are over age 70 ½, rather than just taking a tax deduction on your tax return, consider making a Qualified Charitable Distribution (QCD) from your IRA. A QCD allows you to donate directly to the charitable organization of your choice using your required minimum distribution. Because the donated IRA distribution doesn’t appear on your tax return, you don’t have to pay income tax on the amount. Plus, you don’t need to itemize deductions in order to get the deduction. 
   
• Fully fund your retirement accounts. 
  There are many ways to save for retirement in a tax-deferred manner. If you have a good plan through your employer, take full advantage of it. But don’t stop there. Work with your tax planner or financial advisor to see if it makes sense to add a traditional IRA and/or a Roth IRA for 2017.  If you’re self-employed or own a business, a SEP IRA or Single 401(k) may also be an option. Whatever type of fund you have available, do what you can to max out your contributions—and perhaps make additional contributions for your spouse as well—to both reduce your tax bill and grow your retirement nest egg.
   
• Sell off your losers.
  This one may be the toughest task of all. Sure, 2017 was a great year for the stock market overall, but are you holding on to a few stocks or funds that are worth less than what you paid for them? Emotionally, selling off your losers can be rough—no one wants to buy high and sell low. But the good news is that by selling now, you can receive a tax benefit from those capital losses. Called “tax-loss harvesting,” this strategy allows you to deduct up to $3,000 of losses each year from your ordinary income. You can use your losses to offset this year’s capital gains, or you can carry losses forward until you have gains to offset in the future. And if you still like the company and want to own the stock long term? No problem. You can repurchase the stock after year end—just be sure to wait at least 30 days to buy it back. 

Of course, just like financial planning, the most effective tax planning is done year round. Your advisor or tax planner can help. But by taking these 5 basic steps today, you can give yourself the gift of lower taxes this holiday season and throughout the coming year.