The end of the year is rushing to a close, which means now is the time to finish your plans for saving money on your taxes. While there are some things you can do after December 31st to lower your tax obligations, most things must be accomplished by the year’s end. These year end tax tips are things you can do between now and December 31st to lower your tax obligation next year.
If you’ve found yourself at the end of the calendar year and you could be facing massive taxes, you might be wondering about ways you can lower those tax blows as much as possible. This article is going to look at some of the ways you leverage your taxes and make the most of your money.
Contribute to your retirement accounts. Most contributions to your defined contribution plans such as a 401k, 403b, TSP, etc., need to be made by December 31st. Increasing your contributions will reduce your taxable income. You can also contribute to a Traditional or Roth IRA, SEP IRA, or Solo 401k plan and certain other retirement plans after December 31st and still reduce your taxable income – as long as you contribute before the tax filing deadline.
If you can contribute extra to your retirement funds this year, then try to do it in the accounts that close out by the end of the calendar year before contributing elsewhere. Here is more information about how to maximize your retirement plans at the end of the year.
The maximum limits for these accounts can change every year. Every couple of years, the government decides to raise the limit. Stay on top of those limits to ensure you’re getting the most out of your accounts.
If you aren’t hitting the contribution limits of your 401k or Roth IRA, then you’re missing out on a serious opportunity. This is especially true your employer has a matching program.
If you’ve already maxed out your 401k account (which you should be doing), consider opening up another investment account. Putting money into an investment account is a good way to make the most of your taxes and put your money to work.
Donate to charity. Any donations you make to a qualified charity can be deducted when you file your taxes next year. This includes donations such as tithing or giving to an organization such as Goodwill, or the USO. Before you give to organizations, you should know which questions to ask to determine which charities are legitimate and be aware of charity scams.
The end of the year is the most popular for people to make donations to charity. Sure, giving to a charity is beneficial for your taxes, but it’s also good to give back to the community and the nonprofits you care about.
Pay qualified business expenses. If you have your own business, you can write off certain expenses. As long as you pay your expenses by the end of the year, you can write it off next year. I run a couple websites, so for me, this would include things like prepaying for web-hosting, buying a new computer, paying for advertising, or other qualified business expenses. Your business may have other expenses which you can pay during the tax year to get the deduction this year. This is an area where hiring an accountant can really pay off.
Additional tips for saving money on your taxes:
- Contribute to a Health Savings Account. Contributions to a Health Savings Account are made with pre-tax income.
- Harvest your losses. You can sell losing investments and offset up to $3,000 of other income per year. Any additional losses can be carried forward to future years.
- Prepay your mortgage and property taxes. If you itemize your taxes, you can deduct mortgage interest and your property taxes. If you make your January payment in December, you can deduct the interest for the tax year in which the payment is actually made.
- Prepay other deductible expenses. You can also prepay other deductible expenses such as medical costs, student loans, etc.
- Complete any deductible home improvements. Certain home improvements are tax deductible if they improve your home’s energy efficiency.
- Avoid mutual funds with high capital gains distributions. Capital gains distributions equal taxes, even if your fund lost money.
- Contribute to a 529 plan for your kids. Many states allow deductions for 529 contributions.
- Deduct job related expenses, including moving. If you moved over 50 miles for a job or relocated due to military requirements, you can deduct related job expenses. You can also deduct mileage on your personal car if it was used for work (commuting does not count).
- Have a baby. Babies are great tax deductions!
Every person is different and every household is going to have different tax needs and financial goals. For example, if you’re a senior or you’re about to retire, your taxes are going to look extremely different than someone who is 30-years-old.
Unless you’re a tax expert, you might be confused with the whole process. I understand, it’s not the easiest concept. If you’re having problems deciding what to do at the end of the year, maybe it’s a good idea to hire a financial advisor.
They can walk you through your investment accounts, any deductions your missing, and much more.
You may think of a financial advisor as an expensive option, but it could be one of the best decisions. A certified financial planner can help you set up a map for all your finances.