When it comes to worrying about your taxes, most people only worry about it when tax season rolls around in late January. This is when employers send out W2’s for the year and most people get a start on filing their taxes.
How to Plan For Taxes At The End of The Year
The truth of the matter is that tax season should be year-round as every financial move could have implications on your taxes by the end of the year. This is why it’s a good idea to have a year-end tax strategy put into place to handle any last-minute changes to your financial situation. We’ll look at five proven year-end tax strategies to lower your tax liabilities come actual tax time in April.
529 Education Savings Plan
Funding a 529 plan can have far-reaching positive implications not only on your tax liability but also for the educational funding gift to the recipient to help pay for their education. The money grows tax-free just like a Roth IRA and won’t be taxed when the money is distributed to pay for college. Funding the plan can also count as a tax credit on state income taxes in over 30 states which will lower your state tax liability in those states.
Contribute The Maximum Allowed To Retirement Accounts
Many companies will match your contribution with some larger companies matching dollar-for-dollar what you put into the account. You can deduct up to $6,000 in traditional IRA contributions in a single tax year. The last quarter of the year is a good time to check and see how much you have left to hit your contribution cap. You can adjust your contributions to hit that cap by the end of December and fully realize your contribution deduction in April when you file your taxes.
Deferring End-Of-Year Money To January
Many companies will hand out bonuses in December for the holidays or a 4th quarter bonus (if they pay bonuses quarterly) before the end of the year. If you accept the payment before December 31st, it falls on your current year taxes and will have to be reported in April on your tax return as taxable income. If you foresee a lower tax bracket next year due to life changes (marriage, divorce, etc.) or income changes, it’s in your best interest to hold off on receiving any December payments until early January. This way, you won’t have to report it as income until next year’s tax return in April 2021.
Contribute To Charity / Tax Payments / Medical Bills
You can make contributions to charity in December to lower your taxable income in April. This also holds true for any tax payments that you make involving property taxes and state taxes. Those payments will be reflected in April and are both deductible.
If you made money by selling stocks and investments you can offset the tax liabilities with those winning plays by also selling your losing stocks and investments. If you were extremely unlucky this past tax year and hold more losing investments than winning ones, you can deduct up to $3,000 in losing investments on your tax return. If you lost more than $3,000, you can carry the overage to the next tax year and apply your losses to your 2020 return.
Alternative Minimum Tax
A quick aside here is that all of these year-end suggestions apply to those who don’t pay AMT or Alternative Minimum Tax.
These are just a few suggestions to help bolster your tax return in April. For more information on how you can lower your tax liabilities, contact MB Group today and speak with a representative.