5 Tax Tasks to Complete Before the End of the Year
The final days of 2016 are ticking down. And so are some chances to lower next year’s tax bill.
- Donate. Many organizations accept — and offer charitable donation receipts for — household items, cars and boats. These donations not only are good for the community but they also may be tax-deductible. Just remember to itemize deductions to get the tax benefits. You should also keep detailed records, which vary depending upon the amount of your contributions and whether the contributions are cash or noncash contributions, or out-of-pocket expenses when donating your services. See IRS Publication 526, Charitable Contributions, for more details.
- Spend it or lose it. Flexible spending accounts (also called cafeteria plans) allow you to set aside pretax dollars to cover out-of-pocket medical expenses, such as deductibles or copays on doctor visits. If you participate in such a plan, you decide yearly how much to set aside, tax-free, from your salary. If you don’t use all the money by the deadline (check your plan’s grace period or possible carryover provision), you could lose your dough.
- Sign up for health care. Health care enrollment affects taxes because the computation of any potential subsidy happens through your tax return. If you are not currently enrolled in a health care plan, you have until Jan. 31 to enroll through the Health Insurance Marketplace. If you don’t enroll in a plan, the penalty — which can be as high as $2,000 — will be deducted from your federal tax filing.
- Remember retirement. Dec. 31 isn’t the last day to make contributions to an eligible retirement account; the real deadline is April 17, since April 15 is on a Saturday. Still, it’s a good self-imposed deadline before the holidays to draw your attention elsewhere. For traditional IRAs, retirement contributions grow tax-deferred until retirement and also may be tax-deductible now. Qualified distributions from Roth IRAs are tax-free and penalty-free*. In some cases, you might need to establish the retirement plan before the end of the year. Remember, you can put money aside in chunks — it doesn’t have to happen all at once. For more details, see IRS Publication 590-A, Contributions to Individual Retirement Arrangements. For those who may not need income from their IRAs, and are charitably inclined, a Qualified Charitable Distribution (QCD) may be an option. A QCD is generally a nontaxable distribution made directly from your IRA (other than a SEP or SIMPLE IRA) up to a maximum of $100,000, to an organization eligible to receive tax deductible contributions. You must be at least age 70 and 1/2 years old when the distribution was made. The QCD is not tax deductible, but can count against your RMD, and may reduce your taxable income. For more information, search within IRS Publication 590-B for “qualified charitable contribution.”
- Estimate. Do some year-end planning so you can anticipate any tax liability. If you sold any stocks or bonds in 2016, you may have substantial gains or losses to report. If you had gains, you may owe money when it comes to filing your tax return. Avoid sticker shock by estimating whether a tax payment may be necessary. If so, you have until Jan. 15 to pay the estimated tax and avoid IRS penalties.
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*Withdrawals from an IRA made prior to age 59½ may be subject to a 10% penalty tax.
The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe, and the applicable tax law of your state may differ from federal tax law. Therefore, you should consult your tax and legal advisers regarding your specific situation.
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Content courtesy USAA. Used with permission.