Things You Can Do before the End of the Year to Save on Taxes
The right time to start thinking about this year’s tax return is at the start of the year. Aside from that, however, the best time to start thinking about it is right now. Disregarding your taxes—and how every financial decision you make impacts those taxes along the way—typically results in you paying far more in taxes than you should. If tax planning hasn’t been a priority for you so far this year, don’t worry; there are still a few things you can do before the end of the year to save on taxes. Keep reading to learn what they are.
Defer Some of Your Income
If you examine your tax situation and realize that you’ll likely just cross over into a higher tax bracket than normal this year, you may want to look into deferring some of your income until next year. This strategy is best utilized if a one-time windfall has increased your income for this year, but you will fall back into your normal tax bracket next year. By delaying some of that income, you can balance the scales and keep yourself in the lower tax bracket for both this year’s tax return and next year’s.
Of course, deferring income is a bit difficult if you’re a W-2 employee; paychecks and wages typically can’t be delayed. However, if you usually receive a holiday bonus, for example, ask if it’s possible to defer that bonus check until after New Year’s. If you’re self-employed, deferring income is a bit easier. You can simply postpone some of your invoices to ensure they’re not paid until after the calendar turns over to the next year. Just make sure that, if you do this, your business is taxed on a cash basis and not an accrual basis. If you’re taxed on an accrual basis, taxes will be applied to any income earned during the calendar year, regardless of when that work is invoiced or paid for.
Harvest Losses on Your Stocks
“Loss harvesting” is a common end-of-year tax strategy for those with investment portfolios and mutual funds. The idea of intentionally selling investments at a loss can seem counterintuitive, but if the loss harvesting reduces your taxable income enough, it could end up saving you more on taxes than you’re losing on the investment. When you realize losses on stocks and mutual funds, those losses can be used to offset your taxable gains throughout the year, dollar for dollar. Of course, it’s important to perform your calculations carefully to ensure that your losses aren’t exceeding the tax benefits you receive.
Additionally, if your realized losses exceed your gains on your investments, you can use up to $3,000 of the excess losses to reduce your other taxable income. Excess losses over that amount can be rolled over into the next year, offsetting that year’s investment gains and/or taxable income as well. Loss harvesting takes careful planning and consideration to do it correctly, so we don’t recommend trying this tax strategy without the guidance of a tax expert and/or financial advisor.
Contribute Maximum Amounts to Retirement
Contributing to your retirement accounts isn’t just a good way to save for the future—it’s a good way to save money right now too. When you make contributions to your 401(k) straight out of your paycheck, these contributions are made before taxes are applied, which means your taxable income is automatically reduced as well. If you can increase your automatic contributions for the rest of your paychecks this year, you can save on taxes when you file in the spring.
Additionally, make sure you maximize your contribution to your traditional IRA. Though these contributions are made post-tax, unlike a 401(k), they are tax deductible; you can write off those deductions on your return and save even more on taxes while making smart financial decisions for your future simultaneously.
Sit Down with a CPA
Many people want to sit down with their tax professional during tax season. However, the best way to save on your tax return is to schedule an appointment with a CPA right now. By meeting with us before the year is over, you have the chance to receive expert guidance on what adjustments to make and strategies to utilize to reduce your tax liability before the end of the year.
If you’re looking to cut down on your tax bill in the spring, contact Demian & Company CPAs today to schedule a consultation.