Georgia’s upcoming sales tax holiday on July 30-31 can help families save in taxes on purchases of clothing, computers and other school supplies. But it’s also a good time to put other strategies into place during the second half of 2016 that can help a lot of people improve their financial situation, and in many cases, save on taxes.
Here are five recommendations:
1. Make an extra mortgage payment. Just one extra payment each year can save thousands of dollars in interest payments over the life of a loan. Making additional principal payments can also shave years off the life of the mortgage and build equity faster.
One approach is to divide your regular mortgage payment by twelve, and set aside that amount each month in a separate savings account. Money will still be available if you need it during the year, and you can make a lump sum additional principal payment at the end of the year. Or, simply build an extra mortgage payment into one month’s budget each year and plan accordingly.
While mortgage interest is often the largest deduction for most people, interest saved through extra payments can far exceed the tax savings from interest deductions.
2. Adjust the amount of withholding tax. For any employee who receives a salary, now is a good time to check the tax withholdings on your paycheck.
Ideally, the amount of money withheld throughout the year from your paycheck should equal the actual amount of taxes due at the end of the year. If you owed a lot of money to the IRS in April, it may be time to reduce the number of allowances on your Form W-4. On the other hand, anyone who received a large refund has essentially been giving the IRS an interest-free loan. Generally, the more allowances you claim, the less income tax will be withheld, and the higher your take home pay. The fewer allowances you claim, the more income tax will be withheld, and the lower your take home pay.
In addition, anyone who has experienced a major personal or financial change should also examine their withholdings. Examples include getting married or divorced, having children, landing a promotion, or exercising stock options.
3. Donate appreciated stock. With the stock market hitting all-time highs, charitably-inclined people should consider donating securities such as stocks, bonds and mutual funds that have appreciated over time.
If you donate a security that has significantly grown in value, a tax deduction can be taken for the full market value of the security as long as it was purchased more than a year ago. And because the securities are donated rather than sold, you won’t have to pay capital gains taxes. The more the securities have appreciated, the more advantageous the strategy is.
If you plan charitable contributions over a number of years, consider establishing a donor advised fund. You can take the tax deduction in the year contributions are made to the fund regardless of when funds are ultimately sent to charities.
4. Tax loss harvesting. This strategy enables a person to reduce taxes on capital gains by selling stocks and other securities that have lost value. By selling these stocks and realizing losses – and rebalancing your overall portfolio with the proceeds — you have an opportunity to help ensure your mix of investments is aligned with your long-term financial goals while reducing taxes.
5. Open a Health Savings Account. With open enrollment coming up in the fall, don't overlook the benefits of enrolling in a high-deductible health plan that is coupled with a Health Savings Account (HSA). A high deductible health plan is generally a good option if you are healthy and interested in using a HSA to save or invest money. In fact, often considered the "tax triple play," a HSA is a unique tax tool that offers three tax advantages: a tax deduction for contributions made to the account; tax-deferred growth for investments inside the account and tax-free withdrawals for qualified medical expenses.
Because the account rolls over year after year and there is no “use it or lose it” rule, participating in an HSA can be a tremendously valuable strategy. In addition, people who can pay current medical expenses out-of-pocket while still working and also contribute to an HSA can build a real nest egg to help with medical expenses in retirement.
Ryan Halpern is a senior financial planner for Brightworth, an Atlanta wealth management firm.
