Before you get wrapped up in the upcoming string of holidays and the inevitable bustle that goes with it, financial advisors recommend dedicating some time to taxes. And no, they’re not trying to be funny.
The fact is this: If you want to reduce your 2016 tax bill, most of the available strategies must be deployed before the calendar flips to 2017.
“Unfortunately, too many people try to do tax planning after the calendar year is over, when they’re preparing their tax returns,” said certified financial planner Kevin Meehan, a regional president for Wealth Enhancement Group. “But there just aren’t a lot of choices at that point.”
While Meehan and other advisors say tax planning should be a year-round process if you want to maximize your strategies, there are some end-of-the-year things you can do to reduce what you owe Uncle Sam next spring.
Your retirement accounts are a good place to begin. For starters, advisors recommend maxing out contributions to them. Not only can putting more money into tax-advantaged retirement accounts reduce your tax bill right now, it will help your future become more financially secure.
“Sometimes people contribute only up to their employer match,” said CFP Kevin Reardon, owner and president of Shakespeare Wealth Management. “But if you can go higher, you should.”
The 2016 contribution limit for 401(k) plans is $18,000 for workers age 49 and younger and $24,000 if you’re 50 or older. Because contributions come out of your paycheck before taxes, they lower your taxable income.
Individual retirement accounts have different rules. The 2016 limit for contributions across your IRAs, whether Roth or traditional, is $5,500 for workers age 49 or younger and $6,500 for those 50 and older.
Keep in mind that Roth contributions are not deductible but are tax-free upon withdrawal. Also, you can only put money in a Roth if you meet income limits.
For traditional IRA contributions, a full deduction generally only goes to people who either are not covered by a workplace plan or whose adjusted gross income is $61,000 or less ($98,000 or less if you file a joint tax return). A partial deduction goes to higher incomes, but phases out quickly.
The good news for procrastinators is that IRA contributions come with one of the few extended tax deadlines: typically, April 15 of the following year.
Read more about it on CNBC: http://cnb.cx/2dnePe8