3 smart year-end tax moves to make before 2018

Tax planning should be a year-long process, not just something you do for a few days at the end of the year and for a few days in April. With that in mind, with just a couple of months left in 2017, now is a smart time to start thinking about some year-end tax moves you can make.

Here's why you may want to get rid of some of your losing investments, ask your employer to put more of your paycheck into your 401(k), and take full advantage of a popular deduction before the year comes to an end.


Sell some losing investments


If you have any investments, stocks or otherwise, that are worth significantly less than you paid for them, it could be a smart tax move to sell them before the end of the year. To be clear, I'm not saying that you should sell stocks you believe in for the long run simply because they're down. Rather, I'm saying that if you've been considering selling a certain stock and redeploying your capital elsewhere, selling could help lower your tax bill.

The process is known as tax-loss harvesting. The IRS allows investment losses to offset any capital gains you have. Short-term losses must first be used to offset short-term gains, and long-term gains must first be used to offset long-term gains. If there are no like-kind gains to offset, investment losses can be used to offset any other capital gains, and up to $3,000 of your other income if you don't have enough capital gains to offset. And any excess can be carried over to the following tax year.

Tax-loss harvesting, also known as tax-loss selling, could end up being especially smart this year with the potential for tax reform. While we don't know the details of an eventual tax reform package at this point, it's possible that your marginal tax rate will fall from its current level.

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5 ridiculously simple ways to lower your taxes
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5 ridiculously simple ways to lower your taxes

1. Contribute more to a retirement account

If you put money into a traditional IRA or 401(k) plan, you'll benefit in two ways. First, you'll get the financial security that comes with having savings available in retirement, and the earlier in life you start contributing, the more opportunity you'll give your money to grow. But you'll also benefit from a tax perspective, because the amount you contribute will go in pre-tax. What this means is that if you make $50,000 a year but put $5,000 into your 401(k), you'll only pay taxes on $45,000 of income. Talk about a win-win!

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2. Donate items you no longer use

Is your basement or hall closet overflowing with clothing, tools, and gadgets you don't need? If you donate those items to a registered charity, you'll get to claim a deduction on your taxes. All you need to do is obtain an itemized receipt of what you give away to verify your donation, and you're all set.

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3. Open a flexible spending account

Medical care can be a huge expense for some families. Americans spent an estimated $416 billion on out-of-pocket medical expenses in 2014, and that number is expected to climb to $608 billion by 2019. But if you sign up for a healthcare flexible spending account (FSA), you'll get to pay for eligible medical expenses, like copays and prescription drugs, with pre-tax dollars. For 2016, you can allocate up to $2,550 to an FSA, which means that if your effective tax rate is 25%, you'll save $637 by contributing the maximum. But don't make the mistake of overfunding your FSA. The money you contribute goes in on a use-it-or-lose-it basis, so if you put in the full $2,550 but only rack up $2,000 in eligible expenses, you'll have to kiss that remaining $550 goodbye.

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4. Use pre-tax dollars to pay for child care

Childcare is one of the greatest expenses families with young children face. The average American household currently spends $10,192 a year on full-time day care center care, $7,700 a year on regular after-school babysitting, and $28,900 on a full-time nanny. The good news, however, is that you can shave a fair amount of money off your tax bill by opening a dependent care FSA. Similar to a healthcare FSA, a dependent care FSA allows you to allocate pre-tax dollars to pay for eligible child care expenses, which include preschool and summer camp. For 2016, a couple filing a joint tax return can contribute up to $5,000 a year in pre-tax dollars. If you max out that limit and your effective tax rate is 25%, you'll save $1,250 in taxes. The only catch is that like a healthcare FSA, if you end up spending less during the year on eligible expenses than what you put in, you'll forfeit your remaining balance.

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5. Sign up for commuter benefits

Traffic and rail delays can be a huge source of daily aggravation. But if your commute can't serve the purpose of helping you relax and ease in and out of your workday, it can at least help you lower your taxes. All you need to do is sign up for commuter benefits through your employer, and you'll get to use pre-tax dollars to pay for the costs you already incur. For 2016, you can allocate up to $255 per month in pre-tax dollars for transit and up to $255 a month for parking for a combined total of $510. If you hit that maximum and your effective tax rate is 25%, you'll save $1,530 a year on your taxes.

Nobody likes paying taxes, and there's certainly no reason to pay more than you have to. With a few smart moves, you can lower the amount you ultimately fork over to the IRS and keep more money in your pocket.

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Boost your 401(k) contributions


Unlike an IRA, which allows you to contribute for the 2017 tax year all the way up to the April 2018 tax deadline, your elective paycheck contributions to a 401(k) generally must be made before the end of the year.

401(k) contributions, unless they are characterized as Roth 401(k) contributions, reduce your adjusted gross income (AGI). In other words, if you earn $80,000 and contribute $10,000 to your 401(k), your AGI will be reduced to $70,000, and that's before any other tax breaks to which you're entitled.

For the 2017 tax year, you can defer up to $18,000 of your compensation into your 401(k), with an additional $6,000 catch-up contribution allowed if you're 50 or older. And to be perfectly clear, this doesn't include any employer matching contributions -- this is just how much you can choose to contribute.

Now, for most people it isn't practical to contribute the legal maximum, but the point is that the 401(k) contribution limits are quite generous, so this is one tax break that could potentially save you thousands of dollars -- if you act before the end of the year.


Make an extra mortgage payment


If you itemize deductions, you probably know that you can deduct the interest you pay on your home mortgage. What you may not be aware of is that you can write off the interest paid in the calendar year, not just the interest on your 12 scheduled payments.

Here's the point. If by mid- to late-December you've already made your 12th mortgage payment of the year, you may be able to choose to make your January payment early and have 13 payments' worth of interest to deduct.

This could be an especially smart strategy this year, given the uncertainty of tax reform. To be clear, the mortgage interest deduction isn't on the chopping block -- in fact, GOP leaders have specifically named the mortgage interest deduction as one that's staying, along with the charitable-contribution deduction.

However, the GOP's tax proposal calls for the standard deductions to increase dramatically, which would mean that many taxpayers who currently itemize would no longer need to. In other words, the mortgage deduction is staying, but depending on how big your deductions are, it may not be useful for you if tax reform passes. So you may as well take advantage of it as much as possible in 2017.

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