Every year I have clients that ask me in March or April, “What can I do to lower my tax liability?” In most cases, short of getting in Doc Brown’s DeLorean to go back six months in time and then asking me that same question, there’s not much to do at this point. And I don’t recommend going back in time to six months ago anyway. Can you imagine having to watch those presidential debates a second time? As a side, if you did have the ability to time-travel, I would hope you would use it for something cooler than speaking to your accountant.
But my point is, in many cases there’s not much to be done in April of 2017 to help your 2016 taxes. Luckily, there’s still time left on the clock to lower your tax liability. Spending a bit of time now may save you thousands later. Here are some quick tax tips that you may find helpful.
IRA Contributions: Consider contributing to an IRA. You have until April 18, 2017 to contribute to your IRA and still have it count towards your 2016 tax year. You can put up to $5,500 in your IRA account ($6,500 if you’re age 50 or older), and if you qualify for a tax deduction that could save you well over $1,000 in taxes. Contact your tax accountant to see if you qualify for this tax deduction.
Convert to a Roth IRA: Speaking of IRA accounts… now may be the time to consider converting your traditional IRA to a Roth IRA. You fund a Roth IRA with post-tax dollars. So you won’t receive a deduction when you contribute, but you can pull out all the funds completely tax-free starting at age 59?. Think about it like this—if your investments grow at a rate of 5% and you won’t need your retirement fund for 25-30 years, that’s going to net you a nice amount of tax-free income.
Charitable Donations: The deadline for charitable donations is December 31 at midnight. Get those outstanding pledges in by then if you want a deduction on your 2016 tax return. Consider donating appreciated stock as well. You get to deduct the fair market value of the stock instead of just your cost basis. For example, if you bought stock for $1,000 a few years ago, and it’s now worth $10,000, then donating that stock will get you a $10,000 deduction and you pay no capital gains taxes. This donation only cost you $1,000, but the deduction will save you a few thousand in taxes.
Take Charge of Taxable Income: If you’re a freelancer or small business owner, you may have more control over your tax bill than you think. If you anticipate having more taxable income in 2016 than in 2017, and therefore paying taxes at a higher rate, consider holding off until January 1 to bill your clients instead of the end of December. That will allow you to pay less tax on the same amount of income. On the flip side, you can also prepay many expenses at the end of December, such as rent, to lower your 2016 taxable income. In fact, you can prepay up to 12 months for many expenses and get the deduction in 2016.
Don’t Wait to Reach Out to Your Accountant: Don’t wait until March or April to speak to your accountant (or to find an accountant). The sooner you reach out with any questions you may have, the more likely it is that nothing will slip through the cracks. Reaching out before the end of the year is critical to maximizing your deductions and tax credits. If you don’t have an accountant yet, then now is the time to hire one.
By Daniel Magence, CPA, Esq.
Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether its tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.
