In December, it’s easy to start looking at the year ahead. Most of us are planning for the new year, be it for expenses, like a vacation or a major housing repair that’s needed, or for income, we’ll bring in. Each year we come up with new plans and new strategies. But before you get too far ahead of yourself, look at 2017. Now’s the time when you can alter your finances to save on taxes. Making smart moves at the end of the year is beneficial for the year to come.
Get on Top of Your Deductions
Once you’re 70.5, you must start deducting money from your 401(K) or IRA funds. If you’re still employed, or you’re a 5% or greater owner of a company, this isn’t the case. For everyone else, if it’s your first year taking deductions, you have until April 1st of the following year to retrieve your first income. After that, you have until December 31st of the current year to withdraw that money. That’s in just weeks!
You’re required to withdraw a certain amount each year, so if you don’t take out all your mandatory deductions, the government incurs a hefty penalty of 50% of money not withdrawn. That’s insane. And that’s your money! So take the rest out immediately. It’ll actually save you in the long run.
If you’re working, you can still add to your 401(K) or IRA. Those under 50 can add up to $18,000 per year, and anyone over 50 is allowed to contribute to $24,000 annually. Those numbers really add up in the long term, so if you haven’t hit your number this year, this month put as much in as you can afford, within your limit.
Transfer to a Roth IRA
The difference between a Roth IRA and a traditional IRA is that with Roth, your deductions aren’t taxed. When you convert your savings to a Roth IRA, you will be taxed on this amount, so it isn’t a total steal, but since the money compounds, you end up saving in the long term. There is one caveat, though, and that’s what the above only applies if you’re 59.5 years old when you withdraw, and you’ve had the Roth for at least five years. Even more, the incentive to start one now!
Another great thing about having a Roth IRA is that you aren’t subject to the same required deductions as you are with a 401(K) or a traditional IRA, which means you have more control over your money. After you pass, you can even transfer a Roth IRA to your children, so although the money stops compounding, they can still make periodic withdrawals from that account.
Get Your Withholdings Leveled Out
Some people withhold taxes from their income, with the intention of applying that money to taxes. If this is your intent, you need to have all your money withheld by December 31.
Still, you may not cover what you owe with those withholdings. There are some rules of thumb you need to know, as far as appeasing the IRS. The first is, you must pay within $1000 of what you owe in taxes this year. The second, you should pay 90% of money owed the government of this calendar year. Third, you pay 100% of what you owed last year, as a good faith estimate. The idea is to make sure you’re on the IRS’s radar, and that you’re not trying to skip out on money you owe. Talk to your accountant about this more, if it applies to you.
Manage Your Annual Income
Money comes from new places in your senior years, and there are tons of new rules to follow. It’s a headache. But if you play by the rules, it’ll save you money. So, the first thing to know is how Social Security benefits are taxed. If you’re single, and your combined income hits $25,000 or more, 50% of your Social Security benefits is taxable. If you’re filing jointly with a spouse, the number is $32,000. These numbers go up with income increases – singles who hit $34,000, and joint filers who hit $44,000 combined income, will now have 85% of their Social Security benefits as taxable. Yikes.
Individual senior taxpayers who make more than $85,000 have an increase in Medicare B premiums. This applies to joint filers who hit $170,000 combined. Increases range from $134 to $428 per month. That’s a lot!
Finally, those who have an income that exceeds 400% of the poverty line of their homes will lose premium subsidies if they are also not on Medicare or Obamacare. So, check your income for this year, and projected for next year. If it makes sense, hold off on taking more income this year if next year looks less lucrative.