The holiday season is upon us! I’m sure the last thing we all want to think about is taxes…but…it’ll be the new year before we know it and it is important that you are aware of these year-end opportunities that could possibly save you some tax dollars this spring.
Here are seven tips, reminders, strategies, etc. that could help you:
1. Defer your income
Income is taxed when it is received. Getting a year-end bonus? Ask your boss to hold off until January. Self-employed? Don’t send out December invoices until January. If you’re thinking about selling assets like stocks or mutual funds, consider waiting until the new year if the sale would result in a capital gain.
I know that voluntarily postponing cash flow is not an easy thing to do, but if it could lower your upcoming tax bill, it may be worth it.
2. Accelerate your deductions
This only applies if you itemize your deductions on Schedule A.
- Mortgage interest – If you own a home, prepay your January mortgage payment on 12/31 to deduct that interest this year.
- Property taxes – If you’re a homeowner, prepay your property taxes, if possible (note – payments into escrow are NOT deductible. Property taxes are deducted when paid directly or when paid out of escrow).
- Charitable contributions – Spread some holiday cheer and donate to your favorite charity.
- Medical – Overdue for a checkup at the doctor or a cleaning at the dentist? Out of pocket medical expenses are deductible as long as they exceed 10% of your AGI (7.5% if you are 65 or older).
3. Loss harvesting
If you are carrying any securities or investments at a loss, consider selling them before year-end to generate a deductible capital loss. Losses offset gains; if your losses exceed your gains, you can use up to $3,000 of capital losses in the current tax year to reduce other income (excess losses are carried over to future tax years).
4. Open or contribute to existing retirement accounts
If you are an employee and have a 401(k) or similar plan, make some end-of-the-year contributions to lower your taxable wages, especially if your employer matches. If you’re self-employed, consider opening or contributing to a retirement plan (SEP, SIMPLE IRA, self-employed 401(k), etc.). Plans must be set up before December 31, but you have until your filing deadline (including extensions) to contribute.
Contributions to a traditional IRA are also a great way to lower your income (Roth IRA contributions are nondeductible). You can contribute up to $5,500 per year ($6,500 if you’re 50 or older), and you have until April 15 of next year to do so for this year. Click here to learn more about IRAs.
5. Spend flexible spending account (FSA) money
If you have an FSA and have a balance, try to spend it before year-end. Anything left over after December 31 is forfeited unless your company allows either a $500 rollover or a grace period through March 15 of next year.
6. Pay college costs early
If you have tuition to pay and are able to prepay the spring semester’s tuition before the end of the year, it could benefit you. Depending on your income and other factors, you could generate a tax credit that could reduce your tax liability dollar for dollar. Click here to learn more about tax credits resulting from tuition payments.
7. Take your required minimum distribution (RMD)
If you are over age 70 ½ and you have a tax-deferred retirement account, remember to take your RMD so you don’t get stuck with a hefty penalty (could be up to 50% of the amount you were supposed to withdraw). One way to avoid this is to ask your account administrator to automatically distribute the required amount to you each year.
If you have some financial flexibility heading into the new year––even if it’s just a little bit––consider some of the above tips which hopefully will lower your tax bill when it’s time to file.
Happy holidays and a happy and healthy new year to everyone!
Nick Aiola is a CPA located in New York, NY. Nick provides tax and accounting services to a wide range of clients, including individuals, businesses, and fiduciary entities.