The end of the year approaches, and with it comes the inevitable tax season. Tax planning isn’t just about finding ways to reduce your bill when it’s time to pay the piper—it’s about understanding your financial health, leveraging legal strategies, and ensuring you’re set up for success in the upcoming year. Adopting strategic year-end tax planning techniques can be invaluable in maximizing your hard-earned money.
The following article breaks down some potent strategies for reducing your tax bill as the year draws to a close. Remember, the best tax plan is one tailored to your specific financial situation, but these tips can serve as a starting point for conversation with your financial advisor.
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Leverage Tax Deferral Opportunities
Deferred tax plans can be an excellent strategy for reducing your current year’s taxable income. Many Americans might be familiar with the 401(k) or the IRA—retirement accounts that allow for tax-deferred contributions. By maximizing your contributions to these accounts, you can reduce your taxable income for the current year and only pay taxes upon withdrawal in the future, hopefully at a lower tax rate.
But there’s more to tax deferral than retirement accounts. Various investment options, like certain bonds and annuities, offer tax-deferred growth. Tax Law Advocates tax strategies recommend that individuals review their potential for tax deferral annually to ensure they’re not missing out on valuable opportunities.
Realize Capital Losses
One advantage of a down market is the opportunity to ‘harvest’ capital losses. If you have investments that have decreased in value, selling them before year-end can generate capital losses. These losses can offset any capital gains you might have, and if your losses exceed your gains, you can deduct up to $3,000 of those losses against other income.
Maximize Itemized Deductions
Deductions reduce your taxable income. They’re categorized into two types: standard deduction and itemized deduction.
If your potential itemized deductions (like mortgage interest, state and local taxes, and charitable contributions) exceed the standard deduction for the year, it might be worth itemizing. Consider making additional charitable donations or prepaying your January mortgage to increase your itemized deductions.
Gift Assets To Loved Ones
The IRS allows you to gift up to $15,000 (as of 2022) to any individual without incurring a gift tax. Gifting assets, especially those that have appreciated in value, can be a smart way to reduce your estate’s value while benefiting your loved ones.
Contribute To A Health Savings Account (HSA)
If you have a high deductible health plan (HDHP), consider maximizing your contributions to an HSA. Contributions to an HSA are tax-deductible, and distributions for qualified medical expenses are tax-free. This can be a double win for your wallet.
Bundle Medical Expenses
Medical expenses can be deducted if they exceed 7.5% of your adjusted gross income (AGI). If you’re close to this threshold, consider scheduling medical procedures or buying medical equipment before the end of the year to capitalize on this deduction.
Review Your Filing Status
Your filing status (single, married filing jointly, head of household, etc.) can significantly affect your tax rates and the amount of your standard deduction. Especially if there were changes in your life, such as marriage or the birth of a child, ensure you choose the most advantageous status.
If you expect your income to be lower next year, or tax rates to be higher, consider trying to defer income to next year. This can include asking for a bonus to be paid in January instead of December or, if you’re self-employed, delay billing until the next year.
Invest In Energy-Efficient Home Improvements
The federal government offers tax credits for certain energy-efficient home improvements. If you’ve been thinking about making your home more energy-efficient, doing so before year-end could grant you a tax break.
Year-end tax planning isn’t just about saving money—it’s about making informed decisions that set you up for financial health in the present and the future. By taking the time to review these strategies and discuss them with a financial or tax professional, you can navigate the complex world of taxation more efficiently.
Remember, the key to effective tax planning is being proactive. Waiting until the last minute might cause you to miss out on significant opportunities to reduce your tax bill. Here’s to a financially savvy end to the year and an even brighter start to the next!