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Tax Strategies & Credits

6 Smart Year End Tax Planning Tips

by
Jason Feist
on
10/27/2015
6 Smart Year End Tax Planning Tips

Tax time is approaching and it's time to start planning for taxes that will be paid next year. Businesses and individuals are gathering receipts, completing reports, and overall gearing up for the mayhem that is tax season. The goal is to pay in as little tax as possible, however, this can seem difficult to do. The primary way to do this is to make changes at year-end that will have an effect on lowering adjusted gross income. Since many of these strategies can take time to implement, procrastination is your enemy. The earlier you get on board with tax planning strategies, the easier the process becomes.

Get started with these 6 smart year-end tax planning tips, so tax season can go much more smoothly for you or your business.

  1. Make Adjustments to Your Tax Withholding

If you are employed, you have the option every year to choose how much money you want withheld from your paycheck to go towards your taxes. If you have too much withheld from your check, not only could you have more financial difficulties throughout the year with lower paychecks, you are also providing the government with a tax free loan. If you have too little withheld from your paycheck, you stand the chance of owing a significant amount of tax to the government. Most people attempt to go middle-of-the-road where withholding is concerned.

You may still have the opportunity to make adjustments to your withholding, even though it is close to the end of the year. It is preferable that your actual withholding get as close to your tax liability as possible. Review your pay stubs or income reports and determine how much has been withheld thus far. Calculate your income, and use this information to determine what your estimated tax liability will be. If you fall short, increase your withholdings for the remainder of the year. If you exceed your tax liability, reduce your withholdings to help even things out. Since doing so can have a significant impact on your paychecks for the rest of the year, doing this earlier rather than later will give you more pay periods to help buffer these changes.

  1. Make a Holiday Donation to Charity

Do you itemize your deductions? If so, making a significant donation to a charity of your choice may be a great way to adjust your tax liability for the year. Evaluate your income to determine if you are able make a monetary donation to a charity, and if so, in what amount. You can also look around your home for big-ticket items that you no longer use and could potentially be donated to a charity like the American Red Cross or Goodwill. An old sofa that you no longer use or electronics that you have replaced with newer versions could be donated and provide you with an ample tax write-off opportunity. Just remember to get receipts for everything you donate, monetary or otherwise, and not just those donations that exceed $250. Any charitable donation that you have made this year can be included in your itemized deductions and can help decrease your tax liability for the entire year.

  1. Expedite Your Deductions

If you have tax bills that are due at the beginning of next year, consider making payments towards them or paying them off at the end of this year instead. For example, if you have property tax bills that are due in January, or you make estimated tax payments towards your local or state taxes at the beginning of the year, send in those payments now in order to accelerate your deductions. Another way you might expedite your deductions is to purchase items that you need for work, especially if you are an entrepreneur. Have you been waiting to purchase a new computer system or a new work vehicle? Buy these items now and use them as deductions for this year's taxes instead of next.

  1. Contribute Towards Your Retirement

One of the smartest tax planning strategies is to make large contributions to your tax-advantaged retirement accounts, such as an IRA or 401(k). In addition to helping you reach your overall retirement goal more quickly, contributing to tax-advantaged retirement accounts reduces your taxable income for the year. Additionally, your contributions will be able to grow on a tax-deferred basis. Evaluate your finances to determine how much you might be able to contribute to your retirement accounts between now and the end of the year, and keep diligent records of what you contributed to and when.

  1. Maximize Your Gift Taxes

You have the ability to give $14,000 per year, per beneficiary yourself, or if you are married, you and your spouse can both give $14,000, totaling $28,000 per year, per beneficiary. These gifts reduce your taxable income and are gift tax free, making this a powerful end-of-year tax planning strategy.

  1. Buying Back Stocks That You Sold at a Loss

If you sold stocks at a loss earlier in the year planning to utilize the loss as tax write off you need to be careful not to buy them back too quickly. Doing so could invoke the “wash sale” rules wiping out your expected loss.

The “wash sale” rules prevent taxpayers from selling stocks in their portfolio to generate losses and then repurchase the stock. If you do, the basis is adjusted and the loss is not allowed.

To avoid the wash sale rules, you cannot buy the stock back within a 61-day period beginning 30 days before and ending 30 days after the date of the sale.

The Importance of Planning Ahead

Tax planning can seem overwhelming, especially if you're looking at owing a lot of tax for next year. However, with these smart end-of-year tax planning strategies, you can minimize your taxable income, accelerate your deductions, and get involved in worthwhile things like starting or maintaining your retirement accounts and donating to charity.

If you have questions about your tax liability or how you can decrease your adjusted gross income for the year, don't hesitate to discuss your unique situation with a tax planning professional. A professional can evaluate where you stand and what the possibilities are for you, individually, and can help you take tax planning steps that will be beneficial to you in the year to come.

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Jason Feist

Jason Feist

Jason Feist hails from Ohio and graduated with honors from the University of Cincinnati where he holds a bachelor's degree in accounting. He has a combined 15 years of financial and accounting experience and for the last 7 years he has been the Managing Partner of Empowered Insights - a pioneer in the accounting industry. The mission of Empowered Insights is to be one of the leading firms enriching peoples lives and growing businesses. They specialize in tax preparation, business accounting and consulting.

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