As you can probably tell from the title – 5 year end tax tips, in today’s post, I’ll be going over tax tips and specifically year-end tax tips that will save you on your tax bill!
If you’ve ever wondered what you could be doing now to save on your taxes later or just curious about some of the year-end tax planning strategies the wealthy use to save on taxes, then this article is for you.
Now I know the pure thought of taxes is not exactly fun.
But what is more fun is figuring out ways to reduce your tax liability and owe less the next time you file.
The key to successfully accomplishing this is doing so before the end of the year.
So today, I am going to break down 5 year end tax tips, that if implemented before the end of the year will save you A LOT in taxes.
I should also mention that everyone’s situation is different and it’s important to consult your CPA to assess if these strategies are right for you.
Alright let’s get started.
5 Year End Tax Tips You Can Try
Tax Tip #1 – Contribute to your retirement account
If you haven’t already done so, max out your annual contributions in your 401k or IRA account.
For 401ks, you can contribute up to $19,500 in 2020
For IRAs, you can contribute up to $6,000 in 2020.
This tax tip is actually 2 fold.
For one, you’re saving for retirement. Something everyone should be doing.
And two, the contributions you make to these retirement accounts are… (drum roll, please) tax-deductible!
Usually, 401k contributions are made with pre-tax dollars. So even though you earned this income, it’s not actually taxed yet.
IRA contributions are not made through an employer so it is not “pre-taxed” income. BUT the contributions made are tax-deductible and lowers your taxable income.
To figure out your tax savings, you will need to multiply your tax rate by your retirement contributions.
Also, this tip is a little different since the IRS gives you until the filing deadline to make these contributions. So you have a little after the year ends to take advantage.
Tax Tip #2 – Sell losing stocks
If you have some losing portfolio investments, sell them before 12/31. Especially if you think they won’t come back up. OR even if you do think they will bounce back, you’ll still be able to buy them back after 30 days.
This strategy is actually called tax loss harvesting – completely legal and legit. You basically, sell losing stocks, get the tax break, and then buy back the stock after 30 days at the lower losing price.
Definitely look more into this strategy if you think you could benefit from it.
But essentially by selling losing stocks, you’re able to write off up to $3,000 per year in capital losses or you could use the losses to offset capital gains and lower your taxable income.
If your losses are more than $3,000, don’t worry. You’re able to carry forward any excess losses to the following year.
Tax Tip #3 – Accelerate your business expenses
With this tip, I’m not saying to go out and buy $10,000 worth of unnecessary business equipment or supplies.
Instead I’m saying, if you were already thinking about buying a new business computer, for example, do it before 12/31!
Or if you’re planning a business trip next year, book it before 12/31.
Don’t wait until the new year to make business purchases. This way, you can claim the deduction in the current tax year.
The more business expenses you can claim, the better.
The same is true for business asset purchases. For the sake of simplicity, let’s assume a business asset is anything purchased over $5,000.
Well the IRS doesn’t necessarily let you claim assets this large as a deduction. But instead, you can claim the depreciation expenses on such items.
Still a great benefit and opportunity for you to lower your tax bill.
Tax Tip #4 – Defer income
Similar to tax tip #3, with accelerating your expenses, you should also consider deferring or pushing back your income to the New Year.
The more income you receive in the year, the more taxes you’ll have to pay.
So if you have invoices that need to be sent to your customers in December, just wait until January to send them and defer that income.
The same is true with winning portfolio stocks. If you see a particular investment doing well, you might consider waiting until January 1 to sell and realize those gains.
You could even ask your employer to postpone your year-end bonus to January or February. That way, you’ll realize that income later. Keep in mind that your employer might be hesitant to do that because that would also mean them postponing the write off too.
Now you might be wondering, “Does deferring my income really save me in taxes if they are claimed in the next year? Won’t I just end up paying tax on it later?”
The answer is yes, deferring income saves you in taxes in the current year and yes, you will end up paying taxes on it later.
However, in tax planning, there’s a concept of deferring income for as long as possible. This is because the longer you can postpone income, the longer you can hold off on paying the tax and the longer you’ll have that money in your pocket.
This is a good thing.
Why? Because there are other things you could be doing with that money today and that gives you value today. Also, with continuous planning, you could potentially be in a lower tax bracket when it’s time to realize that income and pay tax.
Tax Tip #5 – Donate to charity
This tip is useful if you itemize your deductions. As opposed to taking the standard deduction.
If you normally give to charity or your church, consider making an extra donation before the end of the year. Make sure the organization you give to is a qualified charity and you receive a receipt for your donation.
The good thing about this deduction is that you can write off monetary and non-monetary donations. So if you give clothes or furniture away, you can get a receipt from the charity showing the value of the items donated.
There you have it! These are 5 year end tax tips that almost anyone can implement and use to lower their tax liability.
- Maxing out your retirement contributions
- Selling losing stocks
- Accelerating business expenses
- Deferring income
- Donating to charity
Which one will you do this year? Why don’t you leave your thoughts in the comments section below?