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Informed Investor: Six tax-saving suggestions to complete by Dec. 31

For employees who want to lower their 2016 federal and local income taxes, between now and Dec. 31 is the most important time to perform the necessary actions. This week’s column presents six tax-saving suggestions for employees that may result in a lower 2016 tax bill. These suggestions include contributing to the traditional TSP and “tax-loss harvesting.”

For employees who are intent on saving on their 2016 federal income tax bill, the most important deadline for taking the necessary action is not Apr. 17, 2017, at which time 2016 federal income tax returns are due, but rather Dec. 31, 2016. This is because Dec. 31, 2016, is the deadline for making year-end tax-saving moves that can reduce one’s tax bill and possibly result in a 2016 federal income tax refund. This column presents six tax-saving suggestions for federal employees to consider and complete by Dec. 31.

Contribute to the traditional TSP or a Health Savings Account (HSA). Contributing to the traditional TSP can result in a reduction of one’s federal and for many employees, state and local income taxes. The reduction amount is approximately equal to the amount of an employee’s total contribution to the traditional TSP times the employee’s 2016 marginal tax rate. For example, if an employee is in a 28 percent federal marginal tax bracket and contributes $10,000 to the traditional TSP during 2016, he or she will save 28 percent of $10,000, or $2,800, in federal income taxes for 2016. The maximum a federal employee can contribute to the traditional TSP during 2016 is $18,000. Those employees who will be over the age of 49 as of Dec. 31, 2016, can contribute an additional $6,000 in “catch-up” contributions, for a maximum contribution of $24,000.

Employees enrolled in a high deductible health plan through the Federal Employees Health Benefits program (FEHB) and who have access to a Health Savings Account (HSA), can contribute to their HSAs up to the IRS’s annual limit. HSA contributions are “adjustments to income,” thereby resulting in reduced taxable income and tax savings.

Make charitable contributions. Employees who itemize on their federal income taxes have a great way to lower their federal and state income taxes as well as to help worthy causes. They can do so by making charitable contributions to qualified charitable organizations. Employees are to be reminded to get a written receipt from the charity for every cash/check contribution of $250 or more. Employees should also have a formal record of all contributions regardless of their amount in the form of a book or credit card statement, or a receipt from the eligible organization. Employees who have owned appreciated capital assets such as stocks, bonds, open- and closed-end funds, or exchange traded funds (ETFs) held for the long term (more than one year) should consider donating the appreciated capital asset to the charity. In so doing, an individual can take a tax deduction for the full fair market value of the appreciated stock and not incur any capital gains tax in the event the individual sold the appreciated capital asset.

Take advantage of and reduce capital gains using “tax-loss harvesting.” Those employees who invest in stocks, bonds, ETFs or mutual funds in taxable accounts or nonretirement brokerage accounts may be able to reduce their taxes due on any recognized investment gains and distributions from mutual funds through “tax loss harvesting.” The idea behind tax-loss harvesting is that an individual investor offsets any recognized gains on investments (capital gains) with recognized losses (capital losses). Capital losses involve selling stocks, bonds, ETFs or mutual funds that have lost value. But long-term investment goals should not be undermined due to selling an investment simply for tax purposes. Tax-loss harvesting needs to be completed by Dec. 31, 2016, in order to use the losses on 2016 tax returns.

Make the most of homeownership tax deductions. Homeownership provides a variety of income tax breaks, some of which homeowners can use by year-end in order to reduce their 2016 tax bills. This includes making one’s January 2017 mortgage payment by Dec. 31, 2016. In so doing, one can include the mortgage interest paid as part of one’s 2016 itemized deductions.
 
“Bunch” potentially deductible expenses subject to adjusted gross income (AGI) limits
. Individuals who itemize on their federal income tax returns—they file Schedule A—know that there are several deductions on Schedule A that can decrease AGI resulting in lower taxable income. But with some of the deductions on Schedule A, the total amount of the deduction must exceed a certain percentage of one’s AGI. For example, out-of-pocket medical, dental and vision expenses cannot be deducted unless they exceed 10 percent of AGI for individuals younger than 65 during 2016. Miscellaneous expenses including out-of-pocket employee expenses and tax preparation fees must be more than 2 percent of AGI. To get over these deduction hurdles, one should start consolidating all of the appropriate expenses paid during 2016. This strategy is known as “bunching” deductions and will hopefully result in some additional deductible expenses on Schedule A.

 

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