With 2017 just a few short weeks away, money seems to be flying out of our wallets in the name of the “holiday season”. Between expensive airfares and never-ending presents for the whole family, spending skyrockets in November and December.
Countdown: Top 5 Ways to Save in 2017
But for those that are paying attention, the last month of the year offers an opportunity to make money too — and one of the easiest ways to make money in 2017 is by taking advantage of the tax benefits in 2016 that can create substantial returns for you and your family. So before you start scouring the Internet for holiday gifts and deals, there are a few tax tasks you should take care of now to set yourself up financially for the new year.
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Now the countdown begins:
5. Use Your Losses To Offset Capital Gains
If you have investments that didn’t perform well this year, now is a great time to sell them to reduce your taxes on capital gains. If you have a net loss for the year, you can claim up to $3,000 of losses to offset ordinary income. If you have more than $3,000 in net losses, the remainder can be carried over to use next year. It’s important to note, however, that if you do sell a security at a loss, you have to wait 30 days to buy it or any “substantially equal” security back in any account. This avoids triggering the “wash sale” rule, which could otherwise nullify your loss and the associated tax benefits.
4. Give Gifts Wisely
Tangible gifts aren’t the only way to give. I’m talking about charity, also known as a taxable donation. You can donate up to 50 percent of your adjusted gross income in cash and 20 percent from appreciated securities to qualified charities to see a massive benefit in the reduction of your taxable income. For example, say you own a stock worth $10,000, but you only paid $2,000 for it. If you give the stock to a charity, you can deduct $10,000 from your income and avoid paying capital gains on the $8,000 appreciation of that stock. It’s a win-win for everybody.
3. Do It For The Kids, And The Tax Break
For anyone with children, another great way to do your 2017 finances a favor is to set up a 529, one of the most commonly used college savings accounts. These plans not only help your children with college expenses (including tuition, books, a computer, or room and board both on and off-campus), but also provide federal tax breaks, and in some cases even state tax breaks, too. Check this page for the latest details on your state’s limits for contributions and deductions. If you’re looking to invest your money in something more useful than new gadgets for the family this year, invest it in a 529. And for an easy reference, the chart below breaks down how much you should aim to have in your child’s 529 by age.
2. Take Matters Into Your Own Hands With An IRA
If you don’t have access to a 401k/403B or other employer sponsored plan, open an IRA/Roth IRA/SEP and max it out for the year (you may contribute $5,500 total per year to a traditional IRA/Roth IRA and even more to a SEP IRA). If you’re not sure which to open, consult a licensed financial advisor, tax professional or CFP(R). If your spouse doesn’t have a plan through their employer or isn’t working, a Spousal IRA may be a great option.
The benefit of saving in an IRA or employer sponsored 401k is two-fold: first, these plans shelter savings from taxes which lowers your income for 2016 (meaning less tax owed!); second, the earlier money is invested the longer it can grow (meaning the sooner you get in the habit of maxing out your retirement plan, the bigger your nest egg will be at 65). For example, investors who begin saving in their early 20’s need to save 10-12% of their annual income to comfortably maintain their lifestyle at 65. On the flip side, investors who begin saving in their 40’s need to save significantly more — in most cases, around 25%, to get the same amount of money by 65!
1. Pay Yourself First With A 401k
If you have a 401k, your goal should be to max it out before spending on the hottest wireless headphones or your next vacation. The contribution limit for 2016 is $18,000 ($24,000 if you’re over 50) — if you haven’t hit this number and won’t hit it by year’s end, adjust your spending to save as much as you can. You could be risking the chance to live the lifestyle you want during retirement if you regularly overspend throughout the year. Additionally, if you’re married, work with your spouse to ensure they are maxing their employer-sponsored retirement plan out as well.
Max Out 2016
During the holidays, it’s all too easy to get swept up in seasonal spending, but before it gets ahead of you, spend a few minutes to do yourself a favor and take advantage of the tax opportunities you have left in 2016. Come April 15, 2017, you’ll be glad you did.