Craig Hammer: How to Hammer Down Your Taxable Income in 2017
Craig Hammer | 2/16/2017, midnight
With the start of the new year, tax documents are beginning to trickle in. Some of you may be surprised by the amount of capital gains realized in 2016 due to the sale of assets or through capital gains distributed by mutual funds.
While you can't undo what occurred in 2016, here are a few ideas to help reduce your taxable income for 2017:
-- Contribute to your company-sponsored retirement plan. Many workplaces will let you invest pre-tax dollars into the company-sponsored retirement plan. If your company's plan is a 401(k), 403(b) or 457(b) plan, every dollar you contribute, up to $18,000 for 2017, reduces your taxable income by the contribution amount. If you are 50 years of age or older, you are allowed an additional $6,000 in catch-up contributions, providing a potential of $24,000 of pre-tax contributions into the retirement plan. As an added bonus, many companies will match a portion of your contributions. Every plan is different, so check with your plan administrator to find out what benefits your company provides. Keep in mind that taxes will be owed on any distribution of pre-tax contributions and earnings for this type of tax-deferred account. If you pull money out before age 59 A1/2, then you could be facing an early-withdrawal penalty as well. If you leave the company sponsoring the plan between ages 55 and 59 A1/2, generally you can take distributions from the plan without the early-withdrawal penalty. However, you would have to pay income taxes on it.
-- Contribute to an Individual Retirement Account (IRA). Depending on your income, tax-filing status and your ability to contribute to a company-sponsored plan, you may be able to contribute to an IRA. Many people enjoy the investment flexibility that an IRA allows, because the IRA is not limited to the investment options the company-sponsored plan offers. By contributing to an IRA, you are again lowering your taxable income by contributing pre-tax dollars, up to $5,500 for 2017 plus another $1,000 catch-up provision for anyone 50 or older. If you are married, you may be able to reduce your taxable income even more by contributing to an IRA for your spouse also. Remember, taxes will be owed on any distributions from the IRA, and a 10% early-withdrawal penalty may apply if you take a distribution before you turn 59 A1/2. There are a few exceptions to the early-withdrawal penalty.
-- Purchase a tax-deferred annuity. If you have maximized your contributions to your company-sponsored plan and/or your IRA but still wish to save additional funds for retirement, you may want to consider a tax-deferred annuity. This type of investment is purchased with after-tax dollars, so you cannot deduct the purchase amount from your taxes. However, since all the earnings and growth of the investments stay inside of the annuity, you would not receive 1099 forms for dividends and interest earned on an annual basis. Taxes will be owed when withdrawals are made, but only on the growth of the investments. If you withdraw from the annuity before you reach age 59 A1/2, then a penalty may apply. Insurance companies issue these types of investment vehicles in different forms. Their features, costs and strategies vary greatly, and they can be complicated. So make sure you understand what the product does or does not do before you buy.