Filing an Amended Tax Return in 6 Steps
An amended tax return is a formal document that a taxpayer may file to correct a tax return from the preceding year. It’s generally used...
8 End of Year Tax Tips to Maximize Your Return
Do you feel like taxes always sneak up on you? Do you forget about them until spring rolls around? If so, you’re potentially leaving thousands of dollars on the table.
The more proactive you are about your taxes, the more you can expect to get back on your return. But here’s the kicker: You can’t wait until filing season to get serious about your taxes. In fact, you can’t even wait until January. It’s important to make intelligent decisions at the end of each tax year.
Here are some specific year-end tax tips that will help you make the most out of your return:
Consider Deferring Some of Your Income
Income is taxed in the year it’s received. However, there are situations in which you can defer parts of your income to the following calendar year, which pushes the tax burden out to the next year.
Not everyone can defer income – and it depends on the type of income – but it’s worth looking into. It can be especially useful if you have a high income this year, but expect to have a lower income the following year.
For employees, bonuses are the easiest to defer. As long as it’s considered a standard practice for your company to pay year-end bonuses in January, you shouldn’t have any problem deferring the payout.
Self-employed workers, freelancers, and consultants have far more flexibility. By delaying your billing/invoices until late December, you can increase your chances of not receiving payment until the following year.
Of course, all of this is a moot point if you expect your income to be higher next year. Deferring will only increase your tax liability and put you in a worse situation.
Take Last-Minute Deductions
The end of the year is the perfect time to take some last-minute deductions. The benefit of waiting until the last few weeks of the year is that you should have a pretty decent idea of your final income figure. This helps you see how much certain deductions will save you.
Charitable contributions are by far the most commonly used method of securing deductions. You can even increase your tax benefits by donating appreciated stock or property. And if you’ve owned the asset for a minimum of 12 months, you get double tax benefits from the donation. (You can deduct the market value on the date of the gift, while simultaneously avoiding capital gains taxes on the appreciation.)
Contribute to Retirement Accounts
The end of the year is the perfect time to make sure you’ve fully funded any retirement accounts that you own. Both 401(k)s and Traditional IRAs allow you to deduct contributions from your income. (Though it should be noted that you technically have until April 15 of the following year to fund accounts for the previous tax year.)
For tax year 2019, the maximum 401(k) contribution is $19,000. It increases to $19,500 for the 2020 tax year. IRA contribution limits are $6,000 for both 2019 and 2020. If you’re 50 or older, you can make catch-up contributions totaling $7,000 per year.
Contribute to an HSA
A health savings account (HSA) is another great place to stash money and get tax savings. These are government-regulated savings accounts that let you put aside pretax income to pay for qualifying medical expenses that aren’t covered by your insurance provider. (However, HSAs are only available to individuals with qualifying high-deductible plans.)
If you qualify for an HSA and have the financial resources to contribute, you need to make it a priority. You essentially get triple tax advantages:
Contributions are tax-deductible in the year you make them.
Assets within the HSA grow tax-free.
Funds can be withdrawn without taxes, so long as they’re used for qualified medical expenses.
According to the latest guidelines, individuals can contribute up to $3,500 to an HSA each year, while families can make a maximum contribution of $7,000.
Harvest Capital Losses
Loss harvesting sounds a little ominous, but it’s totally legal and can be savvy under certain circumstances.
Loss harvesting is the practice of selling off stocks, mutual funds, and other investments to purposefully realize a loss. These losses are then used to offset taxable gains that have been realized on other investments during the year. And if losses exceed gains, you may be eligible to use up to $3,000 of excess losses to cover other income.
Pick Up Capital Gains
Another strategy is to sell stocks that have appreciated significantly and then immediately repurchase them.
This technique only makes sense if you’re currently in a low tax bracket and expect to be in a significantly higher tax bracket in the future. It’s especially helpful if you’re currently in a 10 percent or 12 percent bracket, since capital gains taxes could be zero.
By selling stocks at a gain, paying taxes, and then repurchasing the same amount of the same stock, you essentially reset the clock. This means the amount of tax you pay on future gains will be based on the repurchase date.
Take Any Required Retirement Distributions
If you’re above the age of 70 ½, make sure you’re taking minimum distributions from your IRA or 401(k), Failing to do so could trigger an extremely costly tax penalty.
The IRS has the right to exercise a 50 percent tax on the amount you should have withdrawn (based on your age, life expectancy, and the account balance at the start of the year).
Also, when you do take IRA distributions, it’s a good idea to ask your IRA custodian to withhold taxes from the payment (if applicable). This is voluntary – and you can set the exact amount – but it eliminates the hassle of making quarterly estimated payments throughout the year.
(Note: Roth IRAs are funded using post-tax income. Thus, if you have a Roth IRA, you won’t have to pay any taxes upon taking distributions.)
Meet With Your Tax Advisor
Don’t wait until March or April of the following year to start thinking about taxes. By this point, it’s often too late to make important decisions that could lessen your tax burden.
It’s a good idea to sit down with your tax advisor at least a couple of times per year – with one of these meetings occurring in November or early December.
When you and your tax advisor are on the same page, tax season becomes a breeze. It’s simply a matter of gathering the appropriate documents, filling out a few forms, and sending everything over to the IRS.
Let Taxfyle Connect You With a CPA
The Bible is comprised of 783,137 words. The U.S. federal tax code is longer than 12 Bibles stacked on top of one another.
Over the past 60-plus years, the federal internal revenue code and federal tax regulations have collectively grown from 1.4 million words to 10 million-plus. It’s growing at a pace of about 144,500 words per year, which is roughly the size of two fiction novels annually.
In other words, you’re never going to figure out what’s in there.
Nobody should have to deal with the complexities of filing a tax return on their own. It’s a complicated process. Whether you’re a single individual with limited assets, or a married couple with a large family and a diverse portfolio of complicated assets, it’s a good idea to have a certified professional on your side.
At Taxfyle, we help you get connected with licensed CPA professionals who can handle your taxes and provide peace of mind. Get started today!
Get the latest posts delivered right to your inbox