Many people put off thinking about taxes until a month or two before the tax deadline, but in reality, the end of the year is a great time to think about your taxes. In fact, what you do at the end of the year can often have a much greater impact than what you do at the beginning of the year. As with most deductions, income restrictions may apply so check with the Internal Revenue Service to get details.
Year End Tax Planning Moves
Here are some year-end planning moves to make to save on taxes:
Contribute to Retirement Savings
If you haven’t started contributing to the TSP, a 401(k), or similar retirement account, now’s the time to begin. Your Thrift Savings Plan contributions are not deductible, but the money you put into them comes from pretax dollars. So, in effect, you’re reducing your taxable income.
It is always a savvy financial move to contribute at least as much as your employer will match into your Thrift Savings Plan, 401k, or 403b plans. This takes full advantage of your total compensation package. It’s also a good idea to contribute more than the matching contribution amount if you can afford to do so. See TSP contribution limits for more information about how much of your salary you can defer each year.
You can also contribute to a Traditional IRA, which offers tax deferrals in the year you make the contribution (and you pay taxes when you make withdrawals at retirement age). Be sure to compare Traditional and Roth IRAs to make sure the Traditional IRA is better than a Roth for your specific situation.
Note: In many cases, you can claim IRA contributions made after Dec. 31 — right up through the tax deadline, April 15. Taxpayers under age 50 can contribute up to $5,500; up to $6,500 for those 50 or older. Learn more about annual IRA contribution limits, income limits for deductions, and more.
For accurate information based on your personal financial situation, you should consult a tax professional or get more tax tips online from the IRS.
Take Some Investment Losses
One way to take advantage of fluctuating stock markets is to practice tax-loss harvesting. Tax-loss harvesting is selling a stock or mutual fund at a capital loss. This allows you to deduct the capital loss from your capital gains in the same year. If you have more losses than gains in a given year, you can use up to $3,000 per year to offset ordinary income. Any additional losses can be carried forward to offset future ordinary income. This is a powerful strategy to offset future tax obligations.
There are some rules with this, however. For example, you can not buy the same security within the same 30-day period. This is called the wash-sale rule. You want to avoid that if possible. This is an advanced tax strategy, and one that you should research before acting upon. I recommend visiting the Bogleheads forum for more information on this topic. Or you can consult with a financial planner or tax professional to make sure you do this correctly.
Pay Attention to Your Investments
Make Home Improvements
Some energy-saving home improvements are eligible for tax credits. Making your home more energy efficient is a great way to save money in the long run, as well as get a tax credit that helps you on your coming tax return. This makes it much easier for the home improvement to pay for itself. These types of tax credits come and go, so make sure they are still being offered before spending a lot of money on home improvements! You can only earn the credit if you did not use it for last year.
Give Freely – Charitable Contributions Are Tax Deductible
Donations to many charities and non-profit organizations may be tax deductible. The end of the year is a great time to go through your closets and purge unwanted or unnecessary items. You will help someone else, free up space and earn great tax deductions – all great benefits. Be sure to verify your donations will be tax deductible before making the deduction and ensure you get a receipt for your donation.
How to do it: Spend a Saturday morning going through stuff you don’t want. “Take those clothes and items [in good, used condition] to your local charitable organization right away,” says Sally Herigstad, a certified public accountant and author of Help! I Can’t Pay My Bills. “Be sure to get a receipt to verify the donation was made.” Popular tax-preparation software packages have charitable donation calculators built in, making this one of the easiest deductions you may be able to take.
Pay Deductible Expenses Early
Make your January house payment in December so the interest deduction is included in your coming tax return. And, in December, pay your property tax that is due in January (for the same reason). You should be able to add these payments to your tax return if they are made by December 31st.
Planning to Relocate? It May be Tax Deductible
Pondering a job move? Decide quickly if you want to deduct it from your tax return. You can deduct job-related moving expenses in any given year if you move at least 50 miles from your old home and remain employed full time for at least 39 weeks after the move. If you haven’t met the time test by tax day, you can still deduct moving expenses on your tax return, provided you expect to stay in the job for at least 39 weeks. But if you quit or get fired before the time period is met, you have to report it to the IRS. See IRS Publication 521 for details. Military moves due to a permanent change of station also qualify for the deduction, but don’t have to meet the distance and time requirements, says J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER practitioner™ at USAA.
Customize these Tips to Your Situation
Not all of these tips will work for everyone – remember, each of us has a unique financial and tax situation. Be sure to check with a qualified tax professional or financial planner before making any major financial decisions. In addition, be sure to check with your state for availability of tax deductions or other benefits. You will be glad you followed these tips when you receive your tax refund!