I once talked to a gentleman who said he liked paying taxes.
His theory was that if he was paying taxes, it meant he was making money, and that’s a good thing.
While I certainly agree with his logic, I’ve never met anyone who wants to pay MORE money in taxes than they’re legally required to.
With that in mind, below are some year-end tax tips that may save you thousands of dollars on this year’s tax bill.
Before we get started, let me remind you that ALL of the tax tips outlined below are general in nature and might not make sense in your particular situation.
Please consult with your tax advisor and an independent, fee-only financial advisor to help develop a financial and tax plan that’s right for your situation.
OK, now that I’ve made my lawyers happy, let’s get started!
1. Donate more than just money to your favorite cause
Did you know that many charities will accept appreciated shares of a publicly traded stock or mutual fund, in lieu of a cash donation?
You’ll not only get a tax deduction for the value of the asset on the date of the gift, but you also should avoid any tax on the gain over and above what you paid for it.
This, of course, assumes you’ve held the asset for more than one year. If you’ve held the asset for one year or less, you’re only able to deduct your “cost basis” (the amount you originally paid for the investment).
Yes, technically you’re giving away money in order to save on taxes, but if you’ve read this blog for any length of time, you know how important giving is to a healthy life spiritually, emotionally, and financially.
Our attitude towards giving is one indicator of how much the love of money has crept into our lives.
Giving away some of your money reveals your attitude towards all of your money.
2. Get your tax refund early
Instead of waiting until March or April for your tax refund, why not adjust your tax withholding for the last few paychecks of the year so that less taxes are taken out and more money goes into your pocket?
Use the withholding calculator found here to help you fill out and file a new Form W-4 with your current employer(s). This will help you make sure you’re having the correct amount withheld now and in the future, so you aren’t giving Uncle Sam an interest free loan each year.
I wrote a post earlier this year that talked more about why I hate tax refunds (and why you should too!). You can read it here.
3. Use investment losses to offset gains
If you have investments in a taxable account and they are worth less than what you paid for them, you may be able to deduct some of the losses on your tax return OR use those losses to offset corresponding investment gains.
This one can be a little tricky though, so I’d recommending chatting with a fee-only financial advisor about your individual situation.
They’ll be able to help you figure out whether or not it makes sense to sell a particular security at a loss, and if you do, how to avoid running afoul of any IRS rules.
4. Max out tax-advantaged accounts
If you’re eligible to contribute to a 401(k), Traditional or Roth IRA, or other tax-advantaged savings/investment vehicle (i.e. Health Savings Account, etc.), now would be a great time to max out your allowable annual contributions if you have some extra cash.
Yes, some of these accounts, like Traditional IRAs and Roth IRAs, allow you to make contributions for the previous year all the way up to tax day the following year.
But why not make those contributions now and give your money more time to grow?
5. Consider a Roth conversion
Is your income too high to contribute to a Roth IRA?
If you answered, “yes,” then a Roth conversion may be a good option for you.
Basically, a Roth conversion is a way to take money currently in a Traditional IRA, which offers tax-DEFERRED growth, and “convert” all or a part of it into a Roth IRA, which offers tax-FREE growth.
Like number 3 above, this one can get pretty complex, so definitely talk to an independent, fee-only financial advisor who can help you figure out the best way to do this.
6. Prepay certain expenses
Do you have a mortgage payment, a tuition payment, or some business expenses that you expect to make in January?
If so, you may able to accelerate some or all of those payments and get a tax deduction on this year’s income.
Granted, that means you’ll likely have less expenses the following year and, therefore, less to deduct come the following year’s tax time, but we must not forget the first two rules in personal finance…
Rule #1: A dollar today is worth more than a dollar tomorrow.
Rule #2: Refer to rule number 1
Because the earlier your money is invested, the more time it has to grow through compounding interest. Here’s what Albert Einstein had to say about compound interest…
Compound interest is the eighth wonder of the world. He who understands it…earns it. He who doesn’t…pays it.
Lastly, beware of the AMT (Alternative Minimum Tax). It’s best to talk to your tax advisor and fee-only financial advisor to make sure you don’t inadvertently end up paying MORE money in taxes because you prepaid or accelerated the wrong expenses, thereby subjecting you to the AMT system.
7. Don’t forget your RMD
RMD stands for required minimum distribution.
It’s a withdrawal that you’re usually required to take (hence the name!) from certain retirement accounts following the calendar year in which you reach age 70 ½ .
It’s basically a way for the government to make sure they get their tax money from all of those tax-deferred retirement accounts such as IRAs, 401(k)s, etc.
The reason taking an RMD saves you money on taxes is because if you neglect to take your RMD by the due date each year, the tax penalty is pretty stiff: 50% on the amount you were supposed to take out and pay taxes on, but didn’t.
Roth IRAs, however, aren’t subject to the RMD rules.
You might consider the Roth conversion option mentioned above if you have money in a Traditional IRA and would like to possibly save money on taxes in future years.
For assistance in calculating your RMD, check out these worksheets from the IRS.
8. Choose the right employee benefits
Choosing the right benefits offered by your employer is one of the easiest ways to improve your overall financial plan.
It’s also one thing most people fail to do correctly.
If your company’s open enrollment period is still…well…open, then make sure you evaluate all of your options carefully.
Health insurance, for example, is an area where most people go with what they think is the “best” plan and have no idea what that “best” plan for their situation even means.
Failing to think through all of your possible planned (and unplanned) expenses might cost you thousands of dollars in wasted premiums or missed benefits.
9. Open a 529 College Savings Plan
Want a last minute Christmas gift idea that also helps you save money on taxes?
Let me introduce you to the 529 College Savings Plan.
A 529 College Savings Plan is a great way to help save and invest for your child’s or grandchild’s future college expenses. Many states offer a state tax deduction for resident’s contributions to their state’s 529 plan.
The money in these plans can usually be invested in a variety of different ways, giving your money an opportunity to keep up with the rising costs of college tuition.
When it comes time to pay for junior’s college bill, withdrawals used for qualified higher education expenses are usually tax-free at both the federal and state levels.
Not a bad deal if you ask me!
If you want to learn more about 529 College Savings Plans and whether or not one might be a good fit in your situation, check out our upcoming webinar: What Every Parent (and Grandparent) Ought to Know About 529 College Savings Plans.
You can find out more information about the webinar and register for it by clicking here.
Death and taxes
It’s been said that the only things for certain in this life are death and taxes.
Hopefully, after reading this article, the latter aren’t nearly as certain as you once thought!
Again, the tax tips above are general in nature and might not be the right strategy in your situation, so be sure to talk to your tax advisor and an independent, fee-only financial advisor to learn more about the details of each of these strategies.
These folks are educated and trained to help you develop a financial and tax plan that will get you on the right track towards reaching your goals.
Now, stop reading and get started on some of the tips above to help cut down on this year’s tax bill before it’s too late!