The closing chapters of the year mark a time of reflection…and preparation for the next year. Whether you’re a seasoned investor, a diligent saver or someone navigating the complexities of personal finance, the year-end is an opportunity to optimize your tax position.
Below, we’re detailing tax tips to take you into the next year in the best position possible.
1. Review Your Income and Expenses
The first step in strengthening your financial standing for the upcoming year involves a comprehensive review of your income and expenses. For example, look for potential sources of income that may carry tax advantages. Scrutinize your expenditures to determine opportunities to prepay deductible expenses, thereby reducing your taxable income. In addition, consider contributing to tax-advantaged retirement accounts, such as an IRA or 401(k).
We encourage you to talk with an accountant about the suggestions above and many of the ones below. A tax professional can explain the intricacies of earnings, expenses, credits, etc. Also, see this article for reasons to have a year-end meeting with your accountant.
2. Use Tax Credits
From the widely known Child Tax Credit to education and energy efficiency credits, work to identify ones applicable to your situation. Then, ensure you meet the eligibility criteria and take the necessary steps to claim these credits. (Remember, consulting with a tax professional can reveal lesser-known credits that may impact your tax position too.)
3. Consider Charitable Contributions
Beyond the humanitarian benefits, charitable donations can serve as a tool for reducing your taxable income. First, ensure your chosen organizations are tax-exempt, which is often noted with a 501(c)(3) status but not always. (If unsure, ask your chosen group directly if it’s exempt from taxes.). Next, meticulously document your contributions. You also may want to consider innovative strategies like bundling donations or utilizing donor-advised funds.
4. Analyze Capital Gains and Losses
For those with investments, the year-end is a great time to assess your portfolio’s performance. Evaluate the gains and losses incurred throughout the year and then strategically offset gains with losses to minimize your tax liability. Additionally, explore tax-efficient investment strategies, which an accountant may be the best resource for these.
- To Get Started with Year-End Tax Planning
Tax planning is not a one-size-fits-all endeavor, and it takes time. Here are steps to help you get started.
- Make a Year-End Financial Checklist: Make a to-do list based on the topics discussed above – from reviewing income and expenses to exploring tax credits and charitable contributions to analyzing capital gains and losses and retirement contributions.
- Document and Organize: Gather all necessary documentation, such as receipts for charitable contributions and records of income and expenses. This preparation will also streamline the tax filing process during tax season!
- Consult with a Tax Professional: Reach out to a qualified tax professional (like someone from our team) to tailor these year-end tax tips to your specific situation. Working with a professional means a wealth of knowledge at your disposal and, thus, usually opportunities you’d not considered.
Use our chat box or the form below to start a conversation with one of our tax professionals at Morgan & Associates. And Happy New Year!