Tax planning may not seem particularly festive. However, at Commas, we believe that tax preparation should be a continual process. If we reserve taxes solely for April each year, we may miss out on the massive benefits proactivity brings.
Taking a few moments to implement our year-end tax tips can help simplify your Spring and even reduce your taxes. But, even better: Following these year-end tax tips can help you give more back to your community, or allow you to provide generous support for your family.
Here’s what you need to know.
Year-end tax tip #1: Accelerate your charitable giving.
Sending one year-end check instead of several can benefit both you and your favorite charities. With a tax-deductible gift to a qualified organization, you can reduce your taxable income.
Think about the organizations you support. If they’re nonprofit educational, religious, or charity groups, there’s a good chance that they qualify for tax-exempt donations. (The IRS has a convenient search tool you can use to double-check.)
Next, consider the amount you usually give. Generally, you can claim donations on your taxes if they’re less than 60% percent of your adjusted gross income. If the amount you give is more than the standard deduction, claiming the donation as an itemized deduction can reduce your taxes.
Interested in seeing even more benefits from this year-end tax tip? If you’re able, you can donate stock to your causes, instead of cash. This can help you avoid capital gains tax and allow you to deduct full market value for your appreciated asset.
Year-end tax tip #2: Protect yourself from tax underpayment penalties.
In theory, tax withholding happens behind the scenes, before you get your paycheck, and should cover your estimated tax payment for the year.
Sometimes things change, and the estimated tax payment doesn’t line up with the bill. If it turns out that your regular tax withholding only pays part of your actual taxes, you could be surprised with a large tax bill come Spring.
Give yourself the gift of zero surprises this Christmas with this year-end tax tip! The IRS has an online tool you can use to determine whether your estimated tax withholding is equivalent to the amount of taxes you owe. If necessary, you can use this information to file a new Form W-4 and adjust your tax withholding.
Year-end tax tip #3: Contribute the maximum amount to your retirement accounts.
Tax-deferred retirement accounts are an incredible way to grow your funds over time. At the end of the year, check in on your accounts to see if you’re on track to maxing out your contributions.
And, if you can, consider making those maximum contributions prior to midnight on New Year’s Eve. For many types of IRA contributions, you have until the Spring tax filing deadline.
Here’s the thing: The sooner you contribute money into your IRA, the sooner it has the ability to grow. Even a few months can make a big difference, especially if you make routine end-of-year maximum contributions.
What’s more, making the maximum deductible contribution will help you reduce your taxable income for the year. If you’re looking for a way to deduct your taxes and increase your investing power at the same time, this is a great year-end tax tip to keep in mind.
For 2023, you can contribute $6,500 to your IRA, or $7,500 if you’re over 50. If you’re maxing out your 401(k) contribution, the 2023 ceiling is $22,500 (or $30,000 for those 50+). It’s worth noting that you have until the April 2024 tax deadline to make your 2023 contributions. But you may want to consider taking care of this in the 2023 calendar year to make it easier to track. Note that in 2024, the contribution limits will increase across the board for IRAs, 401(k) plans, and Health Savings Accounts.
Bonus: for those saving into a Health Savings Account (HSA), the same deadlines apply. To maximize your HSA, be sure to contribute $3,850 if you have self-only coverage, or $7,750 if you have family coverage (add $1,000 to each of those if you are over age 55). These can be great retirement accounts if used properly.
Year-end tax tip #4: Pre-pay some bills for yourself or your children.
If you’re going to itemize instead of taking the standard deduction, look ahead to your family’s bills due in January. You may be able to accelerate some of these qualifying expenses. Then, you’ll be able to claim those deductions for this year’s taxes.
Some qualifying deductible expenses include:
- Mortgage payments
- Property taxes
- Tuition (for yourself or for your children)
- Estimated state income tax (as long as it’s due prior to January 15)
- Hospital or doctor’s bills
It’s a good idea to run these expenses past a professional, just to make sure you are able to claim them for this year’s taxes. Which leads nicely into a bonus year-end tax tip:
Year-end Tax Tip #5: Line up a Tax Specialist for filing your taxes.
If you’re looking for a new tax preparer, now is the time. And, if you’re happy to work with your current tax preparer, now may be a good time to check in with both them and your financial advisor. These two professionals should be working together to ensure that your overarching financial plan and your tax plan are in sync. That process should happen far earlier than April 15th, especially if you’re planning on taking advantage of year-end tax tips to streamline your tax season.
Once you’ve spoken with your advisors, relax! Enjoy your holiday season. Hopefully, taking a few moments to consider your 2024 tax strategy will give you the peace of mind you and your family needs.
