The end of the year is a time for reflection for many people. Something about the calendar turning over makes people reassess their pasts and make important decisions about the future. While you're making resolutions, don't ignore your tax planning. There are many year end tax planning decisions you can make at year end to drastically improve your tax situation when April 15 comes around.
Year end tax planning mainly consists of taking last minute action to minimize your tax liability. However, you can also learn much from reviewing your tax liabilities from the previous year. You may discover steps you can take to lessen your taxes in the upcoming year.
Here are some of the most important year end tax planning steps you can take at year end to improve your tax situation:
1) Make charitable contributions.
The holidays are a popular time for giving. You can also use it as a time to lessen your tax burden. Clean out your closets, basement, and other storage spaces to find items that you no longer need or want. You can claim the value of those items as a charitable deduction on your tax return.
Also, do you have appreciated stock that you haven't sold because you don't want to pay the tax bill? You can donate the stock to charity and take the gains as a deduction. You'll also avoid the 3.8 percent tax on net investment income.
2) Accelerate certain expenses.
Do you owe money for state taxes, property taxes, or medical bills? Those are all expenses that can be deducted on your federal tax return. Even if the bills aren't due until the following year, you can pay them early and claim them on your return for the current year.
3) Sell loser investments.
Nobody likes to take a loss, but if you've accepted that you're going to lose money on an investment, you might as well take the loss to offset gains from elsewhere. If you sell the investment by December 31, you can count the loss on your tax return for the current year.
4) Maximize retirement contributions.
There's perhaps no easier deduction than making a contribution to your IRA. Technically, you have until April 15 of the following year to make this contribution. However, end-of-year is usually a good time to do it because it's top-of-mind. If you file a joint return, you and your spouse can each make a contribution to maximize the benefit.
5) Check your RMDs.
This only applies if you're over age 70-and-a-half. If you fall into that age range, this is a step you don't want to miss. At age 70-and-a-half, you're required to take distributions out of your 401k and IRA. The amount of the distribution is set by a federal table. If you miss a distribution, you could be forced to pay additional taxes and penalties. Be sure to check with your 401k and IRA custodians before the end of the year to make sure you've taken your distribution.
6) Use your FSA.
A Flexible Spending Account can be a great way to put money back for medical and family expenses in a tax-efficient manner. However, one of the tricky parts of an FSA is that they money must be used in the year that it is contributed. Whatever isn't used is lost. You'll actually want to check this well ahead of the end of the year because you need to give yourself time to plan how to use it.
7) Check your withholding.
Do you feel like you owe too much this year? It could be because your company isn't withholding too much. If so, check with your HR or payroll department and ask them to increase your withholding. On the flip side, you may feel like you're getting too much of a refund. If you'd rather get that money throughout the year rather than at tax time, you can ask for a decrease in your withholding.
8) Review your satisfaction with your tax preparer or accountant.
While you're reviewing all this tax information, it's an ideal time to review the service you've received from your accountant. Have they responded to your needs and inquiries? Do they seem knowledgeable and competent? Are you happy with their service?
If the answer to those questions is "No," then perhaps you should consider a review from a different accountant. Year end tax planning is the perfect time to get a second opinion. You can compare the advice you get from each accountant and determine which is most likely to provide the best service in the long run.
The end of the year is usually a busy time with parties, holidays, and vacations. However, it's not the time to ignore your tax situation. Year end tax planning is crucial to minimizing your taxes and maximizing your take-home income. A trusted professional can advise you on which year end tax planning steps are most important for your situation.
