Year-End Planning

The Basics

  • If your medical expenses don’t add up to 10% of your adjusted gross income (AGI), see if an elective or necessary deductible procedure would allow you to take the deduction.
  • Contribute to or open a qualified retirement plan by the end of the year (April 15 for IRAs) and lower your taxable income.
  • Donate by Dec. 31 and deduct charitable contributions on this year’s return if you itemize your deductions.
  • If you’re self-employed, delay your December billings until January to reduce this year’s taxes.
  • Here are the top year-end strategies to help you save big on your taxes.
  1. Standard vs. Itemized Deductions — Put the amount of your standard deduction next to your itemized deductions and see how they compare. If your itemized deductions exceed the amount of your standard deduction, you’ll generally save money by itemizing. If your itemized deductions are slightly lower than your standard deduction and you won’t be able to itemize next tax year, try to shift some of them from the next tax year to the current tax year. For example, if you have the option to pay real estate tax in 2 installments, consider making the payment in 2016 that would normally be due in early 2017. But if you can’t itemize in 2016 but can in 2017, consider shifting expenses from 2016 to 2017. For example, make your annual charitable donation in January instead of December.
  2. Flexible Spending Accounts — If you’ve set aside money in a flexible spending account for medical expenses and you haven’t used the entire amount you’ve set aside, you will lose the unspent money. In this situation, it’s a good idea to schedule a few last-minute appointments and purchase items eligible for reimbursement, such as prescription glasses and contact lenses, medicines, and hearing aids before the end of the year. Some plans allow you an extra 2½ months after the end of the year to use the unspent amount — check with your plan administrator. Be sure to submit your receipts for eligible expenses within the time required by the plan.
  3. Miscellaneous Itemized Deductions — If your total miscellaneous itemized deductions, such as employee business expenses, investment expenses, and tax advice and preparation fees, subject to the 2% of AGI floor are close to or more than 2% of your AGI, consider whether you need any items in these categories and purchase them before the end of the year. If the total of these expenses isn’t close to or more than 2% of your AGI, postpone these expenses until 2017 if possible.
  4. Medical Deductions — Keep track of your unreimbursed medical expenses all year long. You can deduct them only if they exceed 10% of your AGI. If you think you’re close to the 10% requirement, consider having an elective or necessary procedure before the end of the year. (Be sure to check that it’s among the qualifying deductible expenses.)
  5. Retirement Contributions — One way to lower your taxable income for the year is to contribute to or open a retirement plan, such as a 401(k), 403(b), deductible IRA, SIMPLE IRA or SEP. You could have made contributions for your 401(k)s and 403(b)s up until Dec. 31, 2016. But you have until April 15, 2017, to make a contribution to an IRA.
  6. Charitable Donations — Donating to charities before the first of the year counts as a deduction on your return. You can include cash contributions that you charged to a credit card in 2016 even if you don’t pay the bill until 2017. You can also include checks mailed by Dec. 31, 2016. Be sure to get a receipt from the charitable organization. Keep in mind that the deduction for donated property is limited to the item’s current fair market value (what you could sell it for at a garage sale).
  7. Mutual Funds— If you’re planning on investing a substantial amount in a mutual fund, be sure the fund isn’t declaring a large amount of dividends in December. If you buy shares before the dividend is declared, you will increase your income by the amount of the dividend even if reinvest the dividend in new shares. You can get this information at the fund company’s Web site.
  8. Securities Sales — If you have a large net capital gain so far this year, you might want to consider selling some securities to generate a loss before year’s end. Doing so could reduce the amount of tax you pay. Remember that if you do sell stock to generate a loss, you are prohibited from purchasing substantially identical securities within the period beginning 30 days before and ending 30 days after the sale that generated the loss. But if the securities you sell are mutual fund shares, you may be able to reinvest the proceeds in a similar (but not identical) fund, maintain your investment strategy, and deduct the loss. If your income is low this year and you have long-term gains, consider recognizing gain to take advantage of the 0% tax rate on long-term capital gain for 2016. But don’t let possible tax savings cause you to make a decision contrary to your investment interests.
  9. Cash Gifts — If you’re planning on giving large cash gifts this holiday season, you can give up to $14,000 (2016) per person to any number of individuals without having to file a gift tax return. The limit is $28,000 if you’re married and the gift is from you and your spouse. In most cases, the gift is not complete until the recipient of a check cashes or deposits it, so be sure the recipient does this by the end of the year.
  10. Self-employment Strategies — If you’re self-employed and use the cash method of accounting, you can decrease your taxable income by delaying your December billings until January. You can also buy supplies and equipment at the end of one year instead of the coming year. You can set up a SEP-IRA and make contributions by the due date of your return (including extensions) and deduct your contributions on the current-year return.