As we enter the final weeks of the holiday season, just about all of us are putting extra pressure on our wallets, from purchasing gifts, enjoying festive nights out and traveling to visit family and friends. And why not? After working hard all year, we want to spend some of our hard-earned money and share it with those we love.
But it also makes sense before Dec. 31 to evaluate your overall financial situation. Here are five actions I recommend taking that could save you plenty of tax dollars and improve your financial well being:
Empty Your Flexible Spending Account. Many people have a Flexible Spending Account (FSA) to cover certain out-of-pocket medical, dental and vision expenses. While contributions to these accounts provide a tax deduction, the money is subject to the "use-it-or-lose-it" rule. So it's important to spend any remaining balance before Dec. 31.
Find out whether your company offers a grace period into 2017 to spend FSA funds. Some companies will allow employees to spend money in their 2016 account through March 15, 2017. If not, make sure you find the time for a last minute run to the pharmacy, dentist or optometrist.
Maximize Retirement Plan Contributions. There may be no better way to save than using tax-deferred retirement accounts. If you have an employer-sponsored retirement plan such as a 401(k) or 403(b), challenge yourself to maximize these contributions. The limits for 2016 and 2017 are $18,000 for those under age 50 and $24,000 for anyone older. For those turning 50 in 2017, plan to adjust your contributions to take advantage of the additional $6,000 "catch-up" contribution.
Many employers match contributions to retirement plans. Even if you can’t save the maximum amount, contribute at least enough to receive any company match. According to a 2015 report by the independent advisory firm Financial Engines, one in four employees is missing out on receiving the full company match, leaving an average of $1,300 of “free money” on the table every year. While it may be too late to make a lump-sum 401(k) contribution to reach the maximum this year, review your monthly budget and take full advantage next year.
For those already contributing the maximum amount, don’t stop there; consider contributing to a Traditional or Roth IRA as well. The good news is the deadline to make these contributions for 2016 isn’t until April 15, 2017. Anyone with earned income can contribute to an IRA. The maximum annual contribution limit is $5,500 plus an additional $1,000 if you are 50 or older.
Donate to Charities. Another way to lower your tax bill is to accelerate certain deductions this year. For those who itemize deductions, charitable contributions by year-end may offset some taxable income. For additional tax savings, consider donating stocks or other securities that have appreciated, instead of cash. If you've owned a security for longer than a year, you can take a deduction for the fair market value of the security and also avoid paying capital gains tax on the appreciation.
Take Your Required Minimum Distributions. If you have an IRA, 401(k) or similar retirement account, the IRS requires you to take a minimum withdrawal from these accounts every year once you reach age 70 and one-half. These annual withdrawals are commonly referred to as required minimum distributions.
This requirement is becoming even more prevalent as baby boomers age. Unfortunately, the penalty is a whopping 50 percent of the amount a person is required to withdraw if not taken. For example, a person required to withdraw $10,000 from their IRA would owe a penalty of $5,000, plus the amount of ordinary income tax owed on the $10,000 distribution.
Generally, a person must withdraw these funds by Dec. 31. However, anyone turning 70 and one-half this year can wait until April 1, 2017. Doing so, however, means you’ll have to take two distributions in 2017, which may push you into a higher tax bracket next year.
Offset Stock Market Gains by Selling Losers. This strategy, called "tax loss harvesting," allows you to reduce taxes on capital gains by selling stocks and other securities that have lost value. Even if your overall investments have grown in 2016, you may own one or two stocks or mutual funds that have lost money. Selling these stocks helps reduce taxes and re-align your investments to meet long-term financial goals.
Taking even one or two of these actions before year end can help just about anyone save money when it’s time to pay taxes. And making a habit of reviewing your financial condition each year as the holidays approach fosters discipline that will improve your financial condition over the long term.
Ryan Halpern is a wealth advisor at Brightworth, an Atlanta wealth management firm.
