6 end-of-year tax moves to make now

Uncle Sam is waiting to collect his yearly bill once the calendar flips to 2017, but there are some money moves you could make now that could minimize the impact of taxes.

Don't delay as many of these strategies need to be implemented before year-end.

"Except for IRA and health savings account contributions, any opportunity a taxpayer has for reducing their tax liability closes on Dec. 31, 2016," says Gil Charney, director at The Tax Institute at H&R Block in Kansas City, Missouri. "Procrastination can bear a high price because the less time the taxpayer has to do adequate tax planning and analysis, the more vulnerable he or she is to making quick but poor decisions near year-end."

[See: 7 Ways to Avoid Financial Stress Over the Holidays.]

Here is a look at six tax strategies investors can take to help lower their tax bills.

Tax-loss harvesting. For investors with taxable accounts, this is a tried-and-true method for offsetting capital gains and losses to minimize tax liability.

"If a taxpayer sells at a gain securities or other capital assets held longer than one year, the taxpayer is subject to capital gains tax," Charney says. "However, if he or she sells other securities for a loss, the gains and the losses will offset each other, helping avoid a capital gains tax on the net gains."

Be aware, there are a few caveats associated with tax-loss harvesting.

"First, selling a security just to generate a loss may be at odds with the taxpayer's investment strategy," Charney says. "Second, the taxpayer should be aware of the wash sale rules, which prohibit a taxpayer from deducting a capital loss on a security if the security, or one similar to it, is purchased within a 61-day window – 30 days before and 30 days after the date of sale."

Check out our guide to commonly-used tax forms:

Guide to commonly-used US tax forms
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Guide to commonly-used US tax forms

The 1040 family of tax forms is for federal income tax and is absolutely essential for all.

The 1040EZ form is the simplest version and is typically filed by those who:

  • Have no dependents
  • Are younger than 65
  • Earned less than $100,000
  • Don’t plan to itemize deductions

Form 1040A is more comprehensive than 1040EZ, but simpler than the regular 1040. It's beneficial for those who earn less than $100,000 and don’t have self-employment income -- but who want to make adjustments to their taxable income, such as child tax credits or deductions for student-loan interest. Note that it doesn't allow for itemized deductions.

Form 1040 is filled out by those who make $100,000 or more, have self-employment income or plan to itemize deductions.

The W-2 is completed by employers document each employee's earnings for the calendar year. You will want to take a look at this tax form for important information you'll need to fill out your 1040, 1040A or 1040EZ. 
The 1098 form is filled out by those who:
  • paid interest on a mortgage
  • paid interest on a student loan 
  • paid college tuition
  • donated a motor vehicle to charity

The 1099 series is reports all income that isn’t salary, wages or tips, and must be reported on both the state and federal level.

1099-DIV reports dividends, distributions, capital gains and federal income tax withheld from investment accounts, including mutual fund accounts.

1099-INT trakcs interest income earned on investments.

1099-OID (Original Issue Discount) is provided if you received more than the stated redemption price on maturing bonds.

1099-MISC documents self-employment earnings, as well as miscellaneous income such as royalties, commissions or rents. It covers all non-employee income that is not derived from investments.

If you receive a refund that you're unable to pay in full, you can request a monthly installment plan using Form 9465.
Don't forget to notify the IRS if you move! Use Form 8822 to change your address with the Internal Revenue Service. Otherwise, notices, refunds paid with a paper check and other correspondence relating to your personal, gift and estate taxes will be sent to your former address.
Anyone who has been employed by a company has completed a Form W-9. The W-9 is used by employers for payroll purposes -- and the information on the W-9 is used to prepare employee paychecks during the year and W-2 forms at the end of the year. 
The W-4 is an IRS form completed for employers know how much money to withhold from your paycheck for federal taxes. Accurately completing your W-4 can both ensure you don't have a big balance due at tax time and also prevent you from overpaying your taxes.

Shift income to 2017 and deductible payments into 2016. If you itemize deductions, paying deductible expenses in December that may not be due until January will allow you to increase your 2016 deductions, Charney says.

For example, if real estate or property taxes are due in January, paying them in December will give you a 2016 tax break.

"However, these taxes are not deductible for the alternative minimum tax, so if you expect to be subject to AMT, this strategy will not work," Charney says.

Here are other strategies to shift deductions. If you work in a state that offers a deduction for federal taxes paid, such as Missouri, making a fourth-quarter estimated tax payment in December will accelerate that deduction, Charney says.

"Fourth-quarter state tax payments made in December, rather than January, will qualify for a 2016 itemized deduction," he says. "The same caution about AMT applies here, too."

In the same vein, pay your mortgage bill early. If you make a mortgage payment in December 2016 that is due in January 2017, you may deduct the interest portion of that payment on your 2016 tax return, Charney says.

Maximize the use of tax deferral. Some of the most common retirement vehicles are employer-sponsored retirement accounts such as 401(k) or 403(b) accounts, individual retirement accounts and simplified employee pension plans.

[See: 9 Food-Focused ETFs to Feed Your Portfolio.]

"Individuals who are self-employed and have significant cash flow may also want to consider setting up his or her own defined pension plan or cash balance plan," says Nancy L. Skeans, partner and managing director of personal financial services at Schneider Downs Wealth Management Advisors in Pittsburgh.

The maximum contribution to an IRA is $5,500 in 2016 with a $1,000 catch up for taxpayers 50 or older. Individuals can sock away much more in a 401(k) plan up to $18,000 in 2016 and up to $24,000 if you are 50 or older.

"Contributions to a simplified employee pension plan are based upon one's self-employment income, but cannot exceed $53,000," Skeans says. "Contributions can be made after the tax year closes but not later than the extended due date of the tax return."

Be aware that Roth IRAs are different.

"Roth IRAs provide for tax-free distributions in retirement years, but contributions do not reduce current taxable income," says Bill Smith, managing director at CBIZ MHM and leader of the National Tax Office in Bethesda, Maryland.

Contribute to a health savings account if you are eligible. HSAs can only be used if you have a high deductible health plan. Many types of plans are not considered high deductible so check with your health insurance provider to ensure your plan qualifies.

For 2016, if you have self-only HDHP coverage, you can contribute up to $3,350. If you have family HDHP coverage you can contribute up to $6,750, Skeans says.

If you are eligible "you can take a deduction on your federal tax return today and also not pay tax on the future growth or distributions if the funds are used for qualified medical expenses," Skeans says.

Charitable giving. Feeling generous? Giving to charity is the only significant itemized deduction that is controlled by the taxpayer, so writing a check to a charity will lower their taxes, Charney says.

"Taxpayers should keep in mind that writing a check for a $100 will not lower their tax bill by the same amount, so 'writing it off' is not a full reimbursement by the government," Charney says. "A taxpayer in the 25 percent tax bracket will lower their federal tax by $25 for every $100 they contribute, which means the other $75 is out-of-pocket."

529 education plans. These plans are not deductible, but that doesn't mean you should shy away from their tax benefits.

"The expense of funding a four-year college education, assuming a degree can even be attained in four years, is daunting. Although you may not be able to save all of the funds needed, a 529 plan is certainly an option that should be considered by every parent as part of their savings strategy," Skeans says.

"Some states do allow a deduction on a state income tax return," she says. "The growth of the account is not taxed on an annual basis, and if the distributions are used for qualifying higher education expenses, the growth will never be taxed."

Everyone gets busy as the year comes to a close, but don't delay taking these tax moves.

[Read: How to Bear Down in a Declining Stock Market.]

"Waiting until the last week of December may result in losing the opportunities that are available to you," Skeans says.

Discover the world's largest tax havens:

World's biggest tax havens
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World's biggest tax havens

Cayman Islands

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United States

(Photo by Lissandra Melo via Shutterstock)


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Hong Kong

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Copyright 2016 U.S. News & World Report

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