It’s time for end of year tax planning! Time to get your financial house in order for tax season! What could be more fun that taking a break from holiday festivities and shopping to start thinking about taxes?
It seems like every year when we do our taxes, there’s a few things we wish we would have done in December to reduce our tax bill just a little more. Sound familiar?
That’s where a little end of year tax planning results in great rewards!
Here’s an updated list of money moves to make before the new year.
Year End Tax Moves
- Run a preview. Before the end of the year run an estimate using the tax calculator or Turbo Tax. If you wait until the new year, it’s often too late to go back and make changes. Start running projections now before the year end!
- Bump up contributions to retirement plans. Contribute more to your 401k by the end of the year to reduce your taxable income and your tax bill.
- Plan for health insurance changes. The penalty for no health insurance goes up each year. If you qualify for the Health Insurance Premium Tax Credit here’s How to Claim the Health Insurance Premium Tax Credit on your tax return.
- Take your losses. Did you lose money on your investments? If so, you might as well sell them and take the capital loss. Commonly referred to as tax loss harvesting, losses (that exceed gains) are capped at $3,000, but you can carry them forward into future tax years. To understand why you might do this, here are 3 Benefits of Tax Loss Harvesting.
- Take your gains. Once again, you can pay 0% long term capital gains if you are in the 10% or 15% tax bracket. If you are planning to sell, you might as well do it before year end if you fall in this tax bracket!
- Review investment tax rules. Don’t forget about the 3.8% Investment Tax on investment income, including capital gains and dividends, that kicks in for high income filers. If you are subject to the investment tax pay close attention to your end of year strategy to realize gains and losses.
- Prepay your mortgage and real estate taxes. Even if your payments aren’t due until January, you can pay them in December to deduct this year, if you itemize. Should you pay this year or wait? For more information, see how to determine if you should accelerate your property tax deduction into the current year.
- Give away your money. If you were planning to give a lot of money to someone special, utilize your annual gift exclusion of $14,000. More than that and you are subject to the gift tax.
- Use your flex spending money. The use-it-or-lose it rule makes your money disappear if you don’t use it. Check your plan for the deadline to incur costs and submit reimbursement requests. If you don’t know what to spend your money on, see the list of ways to use all of your flex spending account. It’s also a good time to remember to enroll in your 2016 flexible spending account if you haven’t done so already. The $2,550 flex spending plan limit will stay the same for 2016.
- Donate. We all know we can donate clothes, books, and household stuff to Goodwill. But dig deeper and you might be able to find more ways to make a charitable donation. For example, I like to remind newlyweds that you can donate wedding dresses and attire to take a tax deduction. Be sure to research the charity to make sure you know how your donations will be used.
- Finalize your records. If you plan to deduct mileage on your personal car make sure your mileage logs are complete. Remember you will save yourself time by being organized! Review how long you need to keep your paperwork before throwing out any records.
- Review your checklist. I keep an end of year tax planning and finance checklist. The checklist comes in handy to determine what needs to be done each year to keep our finances in order. If you don’t have an annual list, now is a great time to make one. Just write everything down as you go.
- Make 529 plan contributions. If your state has a deduction for 529 plan contributions, make your contribution before year end.
- Do an AMT analysis. If there’s a chance that you will be subject to AMT, analyze your deductions to see if you are better off waiting to make some of the above moves.
- Close your IRA. While this one is very extreme, I keep it in the list to remind you to review the performance of your IRA. If you carefully evaluated the pros and cons, and decided to take a loss on an IRA, you must close your account before year end to claim your loss on your taxes this year.
- Fund your IRA. You have until the tax deadline to maximize your Roth IRA contributions. However, if you’re getting an end of year bonus, it might be a good time to stash it away!
- Convert your IRAs. After running our tax estimates, I determine if it makes sense to make a Roth IRA Conversion. If you need to make one, don’t forget it needs to be done by the end of the year. In addition, if you are planning to use the Backdoor Roth IRA strategy this year, you also need to determine if you want to make your conversion by the end of the year.
Determine if You Need to Pay Tax or File
Finally, after you’ve reviewed all the end of year planning, review the requirements for filing and paying taxes. Finding out in April that you need to pay tax on unemployment, you made over the minimum income to file taxes, your kids need to file taxes or that your social security benefits are taxable aren’t usually welcome surprises. Do yourself a favor and review the requirements before the end of the year.
What additional moves are you planning to make for 2015 end of year tax planning?