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Many people are aware of common ways to reduce taxable income, such as increasing 401(k) contributions.
Many people are aware of the most common ways to reduce their taxable income, such as increasing their 401(k) contributions. If you haven’t made the maximum contribution for 2017 — $24,000 for people 50 and older or $18,000 for anyone under 50 — it’s not too late to do so.
But with the end of year approaching, what other strategies can investors employ? Even with the proposed federal tax law changes pending, here are a few places to start:
1. Donate appreciated stock or other securities to nonprofits. People with investments in stocks, bonds and other securities can donate those that have appreciated in value that they’ve held for at least one year, resulting in significant income-tax savings. In fact, donating stock saves even more taxes than donating cash, since there is no capital gains tax when appreciated securities are given to a nonprofit.
Here’s how this works for people with a federal tax rate of 39 percent and a state tax of 6 percent:
- By making a $10,000 cash donation, they can save $4,500 in taxes.
- However, making a $10,000 donation in stock that has doubled in value saves approximately $6,000 in taxes, including $1,500 in future capital gains taxes.
2. Donate other assets that have appreciated. The IRS also provides tax breaks for people donating other assets, such as certain wines, art and land. I recently met with a couple who purchased a painting five years ago that has likely doubled in value. We plan to track the value, as well as other pieces in their collection, to determine if donating any of them in the future makes financial sense.
3. Buy film and TV production credits. Several states offer tax credits to television and film production companies that make a television series or feature film in that state. These companies may transfer or sell these credits to individuals, which means a person can buy a film tax credit and receive a tax break on their state tax returns.