Year-End Tax Strategies

Here are key tax strategies to help you prepare for the upcoming tax season. By taking action before the end of the year, you can reduce your taxable income and make the filing process smoother. Consider these tips to optimize your tax planning.

1. Defer Income

If you expect to be in the same or a lower tax bracket next year, consider deferring some of your income.

  • Year-end bonuses: If your company allows, defer receiving a year-end bonus until the following year to push that income into the next tax period.
  • Self-employed income: You can delay billing clients or collecting payments until January to reduce your taxable income for the current year.

2. Accelerate Deductions

Paying expenses before the end of the year may help you qualify for itemized deductions.

  • Medical expenses, mortgage interest, and state taxes: If you're close to the threshold for itemizing deductions, prepaying these expenses could increase your deductions for the current tax year.

3. Donate to Charity

Charitable donations can lower your taxable income, but it’s important to ensure your donations are tax-deductible.

  • Donate to qualified charities: Make sure the organization qualifies under Section 501(c)(3) of the Internal Revenue Code. Use the IRS Exempt Organizations Search Tool to verify an organization's status.
  • Ask about tax deductibility: Confirm how much of your contribution is deductible by asking the charity directly.

4. Adjust Your Federal Income Tax Withholding

If you expect to owe taxes, you can adjust your withholding to avoid a tax bill at year-end.

  • Increase withholdings: Adjust your W-4 with your employer or use the IRS Withholding Estimator to determine how much extra should be withheld from your paycheck. This can help cover any tax liabilities for the year.

5. Maximize Retirement Contributions

Contributing to tax-advantaged retirement accounts is a great way to lower your taxable income.

  • 401(k) contributions: Maximize your contributions to your 401(k) or employer-sponsored retirement plan. Contribute the maximum allowable amount based on your age.
  • IRA contributions: You can also contribute to a traditional or Roth IRA until the tax-filing deadline for the prior year. While Roth contributions aren’t tax-deductible, traditional IRA contributions may reduce your taxable income.

6. Take Required Minimum Distributions (RMDs)

If you are of the required age, you must take required minimum distributions from your traditional IRA or employer-sponsored retirement plan.

  • Avoid penalties: Failing to take RMDs can result in significant tax penalties. Be sure to take your RMDs by the deadline to avoid any extra charges.

7. Offset Capital Gains with Losses

Review your investment portfolio for opportunities to minimize your tax liability.

  • Tax-loss harvesting: Sell investments that have lost value to offset capital gains from profitable investments. You can also use up to $3,000 of excess losses to offset ordinary income each year.

8. Use Flexible Spending Accounts (FSAs)

FSAs allow you to set aside pre-tax income for certain medical and dependent care expenses, but the funds are subject to a "use it or lose it" rule.

  • Check deadlines: Make sure to use any remaining FSA funds by the end of the plan year, or see if your employer offers a grace period or carryover option.

9. Review Your Last Tax Return

Reviewing your previous year’s tax return can help you identify any missed opportunities or potential changes to consider for the current year.

  • Changes in deductions or dependents: Look for changes in your tax situation, such as a change in dependents or new deductions, and adjust accordingly for the upcoming tax season.

By implementing these tax strategies before the end of the year, you can take control of your financial situation and potentially reduce your tax liability. Whether it’s deferring income, accelerating deductions, or maximizing retirement contributions, smart planning can make a big difference when it’s time to file your taxes.

This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.