Tax Planning Strategies to Start Before The End of the Year
As the end of the year approaches, it’s crucial to get a head start on your tax planning efforts. By implementing key strategies before the calendar year closes, you can significantly reduce your tax liability and ensure you’re prepared for the upcoming tax season. Whether you’re a business owner, freelancer, or employee, understanding and executing tax planning strategies can save you money and time.
Why Tax Planning at the End of the Year is Essential
Tax planning is not something that should be done only during tax season. In fact, starting your tax planning at the end of the year can give you an edge when it comes to maximizing deductions, taking advantage of credits, and making other financial decisions that impact your tax liability. Planning ahead ensures that you are not scrambling to get things done right before taxes are due, leading to better financial management and a more stress-free experience.
Review and Adjust Withholdings
One of the simplest yet most effective tax planning strategies is to review your current withholdings. If you’ve had significant changes in your income, marital status, or family size, it’s time to revisit your withholding settings. Adjusting your withholdings can help you avoid a big tax bill or prevent overpaying on taxes, which means more money in your pocket now instead of waiting for a refund.
A quick review of your pay stubs and withholding allowances on your W-4 can guide whether you should make changes. It’s recommended to check with a tax advisor to determine if adjustments are necessary for your tax strategy.
Maximize Retirement Contributions
If you haven’t maxed out your contributions to retirement accounts like 401(k)s or IRAs, now is the time. Contributions made to these accounts before the end of the year are tax-deferred, meaning you won’t pay taxes on that income until you withdraw it in retirement. This can significantly reduce your current tax liability.
For 2024, the contribution limit for a 401(k) is $22,500 (or $30,000 for those aged 50 and older with catch-up contributions). IRAs have a limit of $6,500 (or $7,500 if you’re over 50). By contributing the maximum amount, you can lower your taxable income and potentially put yourself in a lower tax bracket—an essential tax strategy.
Take Advantage of Charitable Contributions
Making charitable donations is a great way to reduce your taxable income while supporting causes you care about. Contributions made to qualified organizations before December 31 can be deducted on your tax return, provided you itemize your deductions.
Donations don’t have to be in cash. You can also deduct the fair market value of any property or stock you donate. Charitable giving is a vital component of tax planning at the end of the year, allowing you to give back and simultaneously reduce your tax burden.
Harvest Investment Losses
The stock market can be unpredictable, but savvy investors know how to turn a bad year into a smart tax strategy. Tax-loss harvesting involves selling underperforming investments at a loss to offset capital gains from other investments. By doing so, you reduce your taxable income.
You can offset capital gains dollar for dollar and even deduct up to $3,000 of losses against your ordinary income. If your losses exceed this amount, the excess can be carried forward to future tax years, making this a valuable long-term tax planning tool.
Pay Medical Expenses Now
If you expect to itemize deductions, another effective tax strategy is to accelerate payment of medical expenses before the year ends. Medical expenses are deductible if they exceed 7.5% of your adjusted gross income (AGI). By paying medical bills, scheduling procedures, or stocking up on prescription medications before December 31, you might surpass this threshold and benefit from an additional deduction.
Keep in mind that this strategy only applies if you itemize deductions, so it’s essential to weigh the benefits based on your financial situation.
Prepay Property Taxes or Mortgage Interest
If you’re a homeowner, consider prepaying next year’s property taxes or mortgage interest before the end of the year. These payments can be deducted from your taxable income, which could lead to a larger tax refund or reduced tax bill.
However, be mindful of the $10,000 cap on state and local tax (SALT) deductions. For those who have not yet hit the cap, prepaying property taxes and mortgage interest is a solid tax planning technique to reduce liability.
Defer Income Where Possible
Another powerful tax strategy for those expecting to be in a lower tax bracket next year is to defer income until the following year. This could be particularly useful for freelancers, business owners, or anyone who has control over the timing of their income.
By deferring bonuses, freelance earnings, or even the sale of assets, you can delay the taxation of that income to the next year, potentially lowering your overall tax liability. This technique is highly effective for high-income earners who expect their income to decrease in the coming year.
Accelerate Deductions
While it makes sense to defer income in some situations, accelerating deductions can also help reduce your taxable income in the current year. If you know you will be in a higher tax bracket this year compared to next year, accelerating deductions like business expenses or home improvement costs can provide immediate relief.
This tax strategy can be applied to a variety of deductions, from business-related travel and supplies to home office improvements, offering more control over your financial outcomes.
Reevaluate Your Filing Status
If you’ve experienced a change in your personal life—such as getting married or divorced, or having children—it’s essential to review your filing status as part of your year-end tax planning. Your filing status has a significant impact on your tax rate, deductions, and credits. For instance, filing as head of household may provide better benefits than single filing status, while filing jointly with a spouse could lead to greater tax savings.
Consulting with a tax advisor can ensure that you are filing in the most advantageous manner, based on your unique situation.
Make Use of Tax Credits
Tax credits directly reduce the amount of tax you owe, and several valuable credits are available for individuals and families. Some common ones include:
- Child Tax Credit
- Earned Income Tax Credit
- Education Credits (American Opportunity Credit or Lifetime Learning Credit)
These credits can significantly reduce your tax bill, making them essential to incorporate into your tax planning at the end of the year.
Review Your Business Tax Strategy
For business owners, now is the perfect time to review your tax strategies and make adjustments before the year ends. You may want to consider purchasing equipment to take advantage of Section 179 deductions, which allow businesses to deduct the cost of equipment and software purchases.
Additionally, business owners should review employee benefits, retirement plan contributions, and any potential changes in tax laws that could impact the business. Meeting with a tax advisor is key to fine-tuning your business tax strategy and ensuring that you’re maximizing deductions.
Work With a Tax Advisor
While some tax strategies can be implemented on your own, others may require the expertise of a professional. A tax advisor can help you navigate the complexities of the tax code and ensure that you’re taking full advantage of the available deductions and credits.
By working with a tax advisor, you can develop a comprehensive tax planning approach that aligns with your financial goals and reduces your tax liability. Meeting with a tax professional before the end of the year is a proactive step that can help you save significantly when tax season arrives.
Conclusion
Implementing effective tax planning at the end of the year is essential to minimizing your tax burden and maximizing your financial benefits. Whether you’re maximizing retirement contributions, leveraging deductions, or employing business-specific strategies, acting now will help you avoid last-minute scrambling and position you for success in the upcoming tax season.
With proper planning and the right tax strategies, you can confidently approach the new year with a clear financial strategy in place.
Need a Tax Advisor in Bonney Lake, WA?
Here at Wheeler Corr Tax Solutions, we’re here to make your life easier when it comes to managing your taxes and financial planning. Let us take the burden off your shoulders so you can focus on what truly matters to you. Whether you need help with tax preparation, planning, or any other financial service, our dedicated team is ready to provide the personalized attention and expertise you deserve. Reach out to us today, and let’s work together to achieve the best results for your unique situation!