1 Year-End Money Move That Tops Them All

Do a Tax Projection

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If you only make one year-end money move this year, do a tax projection. Estimating taxes before year's end can lead to more money-saving decisions than just about anything else you can do.

Once the calendar year is over, there is almost nothing you can do about your taxes. But if you project what your tax return will look like before the year is over, there are all kinds of things you can do. For example, your tax projection can be used to:

  • Realize losses that reduce your tax bill
  • Realize gains that will be taxed at zero if you do it this year
  • Take IRA withdrawals that won’t be taxed, or will be taxed at a low rate
  • Convert IRA money to a Roth IRA at a low tax rate
  • Donate your required minimum distribution to a charity to save on taxes
  • Increase your 401(k) contribution to reduce your tax bill
  • And much, much more

How to Estimate Taxes Before Year-End

To estimate your taxes, you gather all the same information you would need to fill out your tax return. It's best to start with a copy of last year’s tax return. In the margin, write in what you think this year’s numbers will be.

Then, use an online 1040 tax calculator, put a sample scenario into tax preparation software like Turbo Tax or Tax Act, or if you like doing things by hand, fill out a paper tax return.

Once you have your estimated tax return prepared, here are the key line items to look at:

  • Adjusted Gross Income (AGI) (line 37 on a 1040 Form, line 21 on a 1040A)
  • Taxable Income (line 43 on a 1040 Form, line 27 on a 1040 A)

Here’s what you do with each of these numbers to make year-end money-saving decisions.

AGI

Is your AGI under $117,000 for singles or under $184,000 for marrieds? If so you’re eligible to fully fund a Roth IRA.

You have until April 15 of 2017 to make a contribution for the 2016 year, so start adding to your Roth now and see if you can get the maximum in by April ($5,500 for those age 49 and under, $6,500 for age 50 and up).

If your AGI is over the above-referenced amounts, can you take advantage of any additional tax-deductible savings options? For example, can you defer a year-end bonus into your 401(k) plan? Do you have a high deductible health insurance plan that would make you eligible to make a tax-deductible contribution to a Health Savings Account?

Taxable Income

Is your Taxable Income under $37,650 for singles, or $75,300 for marrieds? If so, you’re below the cutoff between the 15 percent and 25 percent tax rates. Any income over those amounts will be taxed at 25 percent. Take the difference between the cutoff number and your taxable income. That is the amount of capital gains you could realize before year-end and pay no tax. Or you could convert that amount from an IRA to a Roth IRA and it would be taxed at 15 percent. This can make sense if you’re likely to be in the 25 percent or higher tax rate later in retirement when you have required distributions from your IRA.

If your income is over the cutoff amounts, look at investments you own inside any non-retirement accounts.

Are any worth less than you paid for them? Exchange them for something else to realize a capital loss. The loss will offset any capital gains on your tax return first. Once it has offset gains, up to $3,000 of the capital loss can be used as a deduction against other income. At a 25 percent tax rate, a $3,000 loss saves you $750 in federal taxes.

Over Age 70?

If you’re over 70 ½ and have required distributions from your retirement accounts, consider distributing all or a portion directly to charity. When you do that, that portion will not show up in Line 15b on a 1040 (but you put the full amount of the distribution in line 15a), and thus your AGI and taxable income will be lower. When your AGI is lower, that means you may be able to use a larger portion of your medical expenses as an itemized deduction.

These are just a few of the tax savings tips that can be revealed by doing a tax projection before year-end. If you’re not up for doing it yourself, consider investing in a tax professional to help. Your savings may more than offset the cost of their services.