An unexpected tax bill can turn your world upside down. It is always best to be prepared and plan to avoid any unexpected issues in your financial plans. Moreover, there are some smart moves that you can take now to cut your tax bill come filing time. Between now and the end of the year, there is still time to reach out to professional tax accounting services for help. Financial teams like Waters Hardy are tax experts who can manage your tax preparation needs to ensure optimal tax savings.
Tax Savings Strategies to Consider Before the End of the Year
1. Make Necessary Changes to Your W-4
The W-4 is the form you give to your employer that indicates how much tax to withhold from each paycheck. Beginning in 2020, the IRS eliminated the past system of withholding “allowances.” It allows employees to directly determine the specific amount they want to increase or decrease their federal tax withholdings. These changes to your W-4 can be made at any time and could prevent an unexpected tax bill.
If your tax bill last year was significantly more than anticipated, increase your withholdings, so you owe less when it’s time to file your tax return. This also works the other way around. If you got a huge refund, do the opposite and reduce your withholding so you can live on more of your paycheck throughout the year.
2. Max Out Your Retirement Account Contributions
Tax-advantaged retirement accounts compound over time and are funded with pre-tax dollars, making them a great investment for the future. Since the contributions you make to these plans lower your taxable income, they’re also helpful at tax time.
401 (k) contributions must be made by December 31 of that calendar year.
The maximum allowable contributions for the current tax year are:
- $20,500 up to age 49.
- $27,000 for age 50+ (with $6,500 catch-up contribution).
IRA contributions can be made up until the tax filing date in April.
The maximum allowable contributions are:
- $6,000 up to age 49.
- $7,000 for age 50+ (with $1,000 catch-up contribution).
3. Review Your Portfolio and “Harvest” Your Investment Losses
Tax-loss harvesting is a strategy by which you sell taxable investment assets such as stocks, bonds, and mutual funds at a loss to lower your tax liability. The loss can be applied against capital gains elsewhere in your portfolio, which will reduce the capital gains tax you owe. This process allows your portfolio to grow and compound more quickly than if you had to take money from it to pay the taxes on its gains.
Let’s be clear, never let tax avoidance substitute for wise investing. However, if that stock truly doesn’t work for your portfolio anymore, sell it. Getting rid of some of your bad stock picks can result in a tax deduction. You can deduct losses on stock sales, which can offset any taxable capital gains you might have. The limit for single filers is $3,000 or $1,500 for married couples filing separately. Keep in mind that you should never try to outsmart the IRS. It’s important to understand that the IRS can take back your deduction if you repurchase your stock within 30 days.
4. Schedule Your Payments Accordingly
In the tax world, there’s a huge difference between making tax moves on December 31st versus January 1st. If an upcoming bill is tax-deductible, consider making that payment on or before December 31st to take advantage of the tax deduction.
For example, making a January mortgage payment in December could give you an extra month’s worth of mortgage interest to deduct this year. Additionally, if you’re close to reaching the medical-expense deduction, any medical care received before the end of the year is deductible, too. This works the same way for early payments on property taxes and prepaid tuition.
5. “Bunch” Your Itemized Deductions
Itemized deductions are expenses that must be higher than a certain percentage of your adjusted gross income (AGI). “Bunching” your deductions is a way to reach that minimum threshold by delaying a percentage of your expenses in a particular category to the following year so you can itemize the deductions.
Expenses that can be classified as itemized deductions include:
- Medical and dental expenses
- Deductible taxes
- Qualified mortgage interest
- Investment interest on net investment income
- Charitable contributions
- Casualty, disaster, and theft losses
6. Take Required Minimum Distributions (RMDs)
After you turn 72, all employer-sponsored retirement plans mandate required minimum distributions by April 1st. These withdrawals must happen by December 31st to avoid a penalty. Since RDMs are considered taxable income, if you don’t take the RMD, you face a 50% excise tax on the amount you should have withdrawn based on your age, life expectancy, and beginning-of-year account balance. RDMs apply only to traditional IRAs. The original owner of a Roth IRA is never required to withdraw money from the accounts.
7. Spend Leftover Funds in Your Flexible Spending Account (FSA) and Subsidize Your Dependent Care FSA
FSA allows you to set aside as much as $2,850, pre-taxed, to fund out-of-pocket healthcare costs and lower your taxable income. The downside is that you will pay taxes on any funds still in your FSA account on December 31st. Additionally, you’ll lose access to any unused funds unless your employer allows a certain amount in rollovers for the next calendar year.
Now is the time to schedule last-minute check-ups and dental and eye exams, fill prescriptions, and stock up on FSA-approved items like contact lenses, eyeglasses, pregnancy test kits, breast pumps, bandages, and even acupuncture for yourself and your qualified dependents.
Plan Now to Save In the Future
By taking time between now and the end of the year to strategize your tax plan, you can prepare for the upcoming tax season. Learn about how our professional tax experts at Waters Hardy can provide tax preparation and accounting services to cut your tax bill using some of these smart tips. Time is of the essence, so don’t delay. These end-of-year tax strategies can significantly minimize your tax burden in the spring.