As the year winds down and the holiday season gets into full swing the last thing you are likely thinking about is your taxes. While we don’t want to put a damper on your holiday festivities, there are a few things you should do at the end of the year to make the tax season run smoothly.
Here are Nine End of Year Tax Planning Tips so you can start the tax season on the right foot.
1. Verify Withholdings
With the 2018 changes to the tax code, the end of the year is a good time to verify your withholdings and make sure that everything is correct. Correct any underpayments while you are verifying as well. While correcting a fourth quarter underpayment won’t address any previous quarters underpayments, increasing your withholding can retroactively correct other underpayments as the IRS groups all withholding payments together which can correct other quarters underpayments.
If you are already working with a tax professional, they have likely already accounting for this so you won’t have to worry about it, but it’s always a good idea to check. If you are doing your taxes yourself, it is a good opportunity to use the IRS Tax Withholding Estimator to see where you stand.
2. Max Out Your 401K
If you have the means, you should max out your yearly contributions to your 401K. If you are under 50, your max yearly contribution is $18,500 and if you are over 50, you are entitled to a “catch-up” contribution by adding an additional $6,000 making your total maximum contribution $24,500.
Maxing out your 401K means that not only are you taking advantage of the tax-free compounding interest, you are also able to maximize employer matching (if applicable).
3. Give Some Last-Minute Charitable Gifts
The end of the year and the holidays are the perfect chance to give a little more. Consider donating some items or making some cash gifts at the end of the year. Not only will you be able to help someone in need, you’ll also be able to make the most out of your deductions.
Take a look and see if you are hovering on the edge of the standard deduction or itemize deduction. If you’re close enough to take the itemized deduction, make the donations needed to get there as it will help you in the long run and maximize your return.
4. Sell Off “Loser” Investments
Known as “loss harvesting,” selling off your loser investments can increase your gains. Once you sell those investments, you can use the losses to offset any gains made throughout the year to reduce your tax bill.
If your losses end up being more than your gains, you can use up to $3,000 of those losses to wipe out other income. Have more than $3,000 in losses? You can carry it over to the next tax year.
5. Max Out Your Health Savings Account (HSA)
If you have an HSA, you should make every effort to max out your contributions to them by the end of the year. Money in your HSA always remains yours and contributions lower your taxable income making contributions a smart tax/investing move.
6. Avoid the Kiddie Tax
The “Kiddie Tax” was created to prevent parents from shifting their investment income to their kid’s lower tax bracket. Any child’s investment income of over $2,200 is taxed at the same rates as trusts and estates. This applies until the child is 24 if they are a full or part time student contributing less than half of their support.
For this reason, you might want to avoid giving your children stock or investments to ensure that they aren’t taxed like trusts and estates.
7. Double Check Your IRA Distributions
If you are 70 and a half or older, make sure that avoid penalties by taking the annual Required Minimum Distribution (RMD) from your IRAs. If you aren’t using the income from your RMD for living expenses or investments, think about making it a Qualified Charitable Distribution. QCDs won’t provide a deduction, but they don’t count as income so they won’t increase your adjusted gross income.
8. Finalize The Divorce
If you got divorced this year, make sure that it is finalized before the end of the year. If you don’t, the new tax laws mean that the payor of alimony won’t get deductions and won’t treat alimony as income to the recipient.
9. Make Large Online Purchases
Due to the U.S. Supreme Court’s South Dakota v. Wayfair ruling, states can now elect to collect taxes on internet purchases. The laws have been slow to roll out, but it is worth checking if your state is adding the tax for next year. If they are, consider making your large online purchases ASAP to avoid paying the extra tax.
Want more tax advice for next year? Contact us today so we can help!