December. That magical time of year. Heartwarming get-togethers with family and friends. Scrumptious meals. Beautiful Christmas trees. Twinkling lights. And taxes.
Yeah, I know. Nobody is thinking about taxes right now. But you should. Taking a few steps in the remaining weeks of the year could mean less money to the IRS and more money in your pocket. Here are some money-related items that need your attention:
1. Get Your Giving Done
Donations to charitable organizations skyrocket in the month of December. ’Tis the season of charity and generosity! Depending on how much you earn and how much you give, you can claim your charitable giving as a tax deduction.
Get with your spouse and talk about the ministries, non-profits, and foundations you want to support. You may not be able to give as much as you’d like, but what matters is your attitude. I’m sure those nonprofits won’t turn down small gifts.
2. Gather Your Receipts Together
This is especially important if you’re itemizing your deductions. It’s even more important if you’re self-employed. Getting your financial documents together for the accountant early allows you to start out the year fresh, and you won’t get 2016 receipts mixed up with the ones for 2017.
There’s another reason to get things together early: avoiding fraud. If you file your taxes early in 2017, you lessen your chances of becoming the victim of identity theft. If you’ve already filed, nobody else can file a fraudulent return using your information. So get at it!
3. Pay Attention to Life-Change
If you experienced a major life change in 2016, there may be tax implications. This includes adopting a child, marriage, divorce, and death of a spouse or loved one. In some situations, like adoption, you can claim some of those expenses as deductions. In the case of a loved one’s death, any inheritance gifted to you may be subject to taxes. You may want to talk with a tax specialist about what you need to do.
4. Use Up Your Flexible Spending Accounts
Some companies offer FSAs as a benefit. In this program, you can put part of your salary into an account that can be used for medical expenses for you, your spouse, and your dependents. It’s a great benefit because this money isn’t taxed.
However, if you don’t use up the money in your FSA by the end of the year, you lose any money that is left over. Before the end of the month, check on this balance. If you have anything left, get in to see your doctor, dentist or optometrist. Some over-the-counter items are also covered, so you might want to stock up on things like contact lens cleaner and saline solution. Check to see what’s an allowable expense before you go.
5. Prepare for State Taxes
If you’ve moved this year, you may be surprised to find out that you’ll be paying state taxes in addition to federal. Only seven states are free of state taxes, and two states (Tennessee and New Hampshire) tax only dividend and interest income, not earned income.
If you move from one state that taxes income to another state that also taxes income, you’ll need to file two part-year returns. This is another situation that might require some help from a tax professional.
6. Contribute To and Convert Investments
Have you maxed out your investments? You can put up to $18,000 in a 401(k) or Roth 401(k) ($24,000 if you’re over 50). Once you’ve reached that limit, you can still contribute $5,500 ($6,500 if you’re over 50) to an IRA or Roth IRA. If you have a choice, go with Roth options because the growth and withdrawals are tax-free, unless you take the money out too early.
If you make too much money for a Roth IRA, you can open an IRA then convert it to a Roth IRA. This is called a back-door IRA, and it’s completely legal. You’ll pay taxes on the amount you invest, but like the Roth IRA, the money grows tax-free.
You can also convert 401(k) money into a Roth 401(k). Again, you’ll pay the taxes up front but you won’t later in retirement. With any conversions, make them only if you have the cash on hand to pay the taxes. You don’t want to put yourself in a financial struggle.
Also, keep in mind that there will be some paperwork to do with any conversions, but an investing professional can help you. They also know the tax implications, so talk to one before making any moves like that.
7. Make Required Distributions
If you have a traditional IRA, 401(k), 403(b), 457(b), or SEP IRA, you must start taking out regular minimum distributions (RMD) when you reach age 70 and a half (with some exceptions). After that, your withdrawals must be made by December 31 each year.
If you don’t take out the required amount, the amount you didn’t withdraw is taxed at a whopping 50%! That’s a lot of your hard-earned money down the drain, so don’t let this happen to you. Keep in mind, though, that you don’t have to spend the money. You could keep it in a savings account or reinvest it, depending on your age and financial needs.
8. Revisit Estate Plans
This action isn’t tax-specific, but the items you’ve put in your will could have tax implications. And the laws regarding inheritance and giving change all the time, so make sure your estate plan keeps up with any new rules. You want your family to enjoy your gifts without getting taxed by Uncle Sam.
If you have questions about any of these actions, talk to a professional. Their experience and training could mean the difference between paying taxes and getting a refund—and that means more money you can save for your retirement dream!