The end of the year is looming and now is the time to take stock of your tax strategy to be sure you’re seizing every opportunity to reduce the amount you owe the government.
These 6 strategies can help:
Defer Income until Next Year
Your tax bracket for the current year is determined by the income you receive before the end of the year, so it makes sense to minimize that amount whenever possible. If you have the option of delaying some of your income – say, bonuses or income from self-employment – until after the first of the year, it will be beneficial to push that income to next year’s tax return instead of this year’s.
Be careful, however, as it’s possible to push so much income forward into next year that next year’s tax bracket is unavoidably higher.
Pay Expenses Early When You Can
On the flip side of deferring income is the strategy of paying expenses before the end of the year, which allows you to qualify for deductions or tax credits. Medical and dental expenses, for example, can qualify you for a deduction if they reach a specified minimum threshold; other expenses, like college tuition, may entitle you to a tax credit.
Paying qualifying expenses in larger chunks before the end of the year versus paying for them throughout the year can also result in bigger tax benefits.
And, if your employer offers a flexible spending account, you can realize significant tax savings by using that tax-exempt money to pay for qualifying medical and childcare expenses. (A word of warning, however: if you don’t use it by the end of the year, you typically lose it. Sometimes there’s a grace period after the first of the year during which you can still use the money without penalty, but you should always verify.) Always be aware of how much money you have in the account and use unspent funds to pay for qualifying expenses before January 1st.
Harvest Losses on Your Investments
If you have investments that haven’t performed well this year, such as stocks or mutual funds, consider selling them before the end of the year to lock in losses, which you can then use to offset your income for the year. If your losses are big enough, you may even be able to carry some of them over to offset your income next year.
Maximize Your Retirement Account Contributions
Tax-deferred 401(k), IRA, and Keogh retirement accounts help you save money by earning compound interest before you have to pay taxes on the funds. Depending on your age and the type of account you have, the maximum tax-deferred contribution you can make each year varies, but always contribute the maximum amount before the end of the year.
Be Smart About Deductible Contributions
Qualifying charitable contributions can lower your tax bill, but only if you itemize your deductions instead of taking the standard deduction. If you have enough deductible expenses to justify itemizing, make your contributions before the end of the year to maximize the benefit. If your deductions aren’t sizable enough to make itemizing worthwhile, consider waiting until next year to make your charitable donations; you’ll have a better opportunity to take advantage of the tax break.
The first of the year is coming up fast – are you ready for a new tax season? Use our 6 tips and you will be soon! For more information, please contact us today.