With the end of the year quickly approaching, it’s time to start thinking about some year-end tax planning opportunities. Here are 10 tax savings tips you can implement before the end of the year to lower your tax bill come tax time…
1) Charitable Donations
Charitable donations are a win-win. Not only are you able to give to a great cause of your choice, but also you get a nice tax deduction. Find an organization you believe in, write them a check or donate some items around the house, and make sure you give the receipt to your accountant when tax time rolls around.
2) State and Local Taxes
State and local taxes are never fun. You already owe the Federal government money and now you have to pay even more to your state and your local community. However, these taxes are deductible against your Federal taxes in the year they are paid. One thing you can do is pay your state and local taxes BEFORE year end and receive the deduction on this years’ tax return. Be sure to discuss this with your tax preparer as this payment may have an affect on your Alternative Minimum Taxes and deferring the payment to January may make more sense.
3) Monthly Expenses
This is very similar to #2 above as making these payments before year-end may have a huge impact on your taxes. For example, if you have the cash to make your January mortgage payment in December, you should do it. You will get an extra mortgage interest deduction as long as it is paid by year-end. If you are self-employed and work out of a home office, it may benefit you to pay monthly bills that are due in January in December. For example, you can pay your health insurance premium, telephone bill, and utilities early. It never hurts to have 13 expense payments for the year instead of just 12!
4) Selling “Loser” Stocks
Your buddy gave you this “must buy” stock tip and now you are down thousands of dollars. Not the best situation but you can use this to your advantage. If you have other capital gains during the year, you should sell your “loser” stocks before year end in order to offset some of your gains. Obviously losing money on stocks is never fun but this is a small consolation. Be sure to talk to your tax adviser before you do this to avoid the Wash Sale rules which can hamper your plans.
5) Long-Term Capital Gains
If you are a new business owner and you have long-term capital gains from “winner” stocks, you should consider liquidating these assets before year-end. I know that sounds really confusing but if you execute this correctly, you will pay 0% tax rate on some or all of these gains if you fall into the 10% or 15% tax brackets. Which is an amazing deal!
6) Retirement Accounts
If you have some extra cash left over at year-end and you want to invest it, you should consider putting some of it into some sort of retirement account. Many retirement account contributions are tax deductible. You are able to make these contributions up until the filing date of the tax return. There are limits to how much you are allowed to contribute so, again, talk to your tax adviser before you move forward.
7) Health Savings Account
If you expect medical bills in the future you may consider putting money into a Health Savings Account (HSA). Amounts that you contribute to an HSA may be deductible up to a certain limit.
8) Business Expenses
If you are a business owner and your tax return is filed on the cash basis (most are), most expenses you pay by year-end will help lower your income. Lower income equals lower taxes. Don’t just pay expenses to help lower your taxes but if you are able to pay some recurring expenses before year end or accelerate payments on other bills, it will help your tax liability and increase your Cash Flow (see 8 other tips here).
9) Business Accounts Receivable
As a business owner it is hard to determine what the future holds but if you know that you will be in a lower tax bracket this year vs. the next year, you may want try to collect as much A/R as possible before year-end. That way more income will be taxed at the lower rate vs. the higher rate in future years.
10) Additional Medicare Tax and Medicare Contribution Tax
A few years ago two new taxes were introduced. One of these is a 3.8% tax on investment income (Medicare Contribution Tax). This includes capital gains, dividends, interest, etc. The other is a 0.9% tax on your wages, compensation and self-employment earnings. Both of these taxes have certain income thresholds that must be exceeded before they are assessed. If you are at or near these levels it would make sense to make some year-end planning decisions with your tax adviser to potentially reduce or eliminate these taxes.
I understand that some of the information above might seem vague or intimidating. Most of the points I could write an entire post about. All I want is to help you be aware — process these points and talk with your accountant. If you have any specific questions, I would be more than happy to help you. Please reach out to me anytime.