5 Year-End Tax Planning Opportunities

Kolleen Schocke |

Following a solid tax planning strategy throughout the year is an integral part of any financial plan, but there are special considerations to make as the year comes to a close that can help maximize your refund or minimize your liability.

Tax planning is more than completing and filing your state and federal taxes. Year-end tax planning means going over potential tax deductions that you may have missed during the year. Consider these planning strategies with enough time to take advantage of any potential deductions.

Maximize Retirement Contributions to Traditional IRAs

Far too many taxpayers fail to take advantage of their annual retirement contribution limits and miss out on reducing their taxable income. If you have a 401(k)-retirement account with your employer and haven't made the maximum contributions for the year, the end of the year is a great time to do so.

As contributions to your employer-sponsored retirement account are pre-tax, the more contributions you make, the lower your taxable income is. You can deduct the contributions you make to your 401(k) from your yearly taxes while also reducing your taxable income, so maximizing contributions could keep some individuals from running over into a higher income tax bracket.

Because 401(k) contributions come from your paycheck, you must speak with your employer to increase what you're adding to your retirement account. Your HR team should be able to help you find out how much you've already contributed and how much you need to save to hit the annual limit.

Increasing your retirement contributions will decrease your take-home pay but will help you reduce your taxable income and save more for your retirement. Contributions to 401(k)s and 403(b)s must be made by December 31st to impact your 2020 taxes, but the deadline for making traditional IRA contributions is April 15, 2021.

Check On HSA Contributions

Like making 401(k) contributions, adding money to your HSA reduces your taxable income for the year while reducing what you owe in taxes. And HSA contributions are tax-deductible. Also, like making 401(k) contributions, you may need to speak with your employer to change your HSA contributions. This will ensure these contributions are pre-taxed and decrease your taxable income.

Additionally, many HSAs let you invest in various funds, which have the potential to earn income and increase the value of your HSA. While funds in an HSA can only go toward medical purchases, it never hurts to have a little more saved for medical expenses.

Contribute to Charity

Donating to your favorite charity is may be a way to reduce your taxable income, but there are several options to explore.

Donate cash or goods to a qualifying charity. Collect and file all receipts with your return.

Contribute to a Donor-Advised Fund (DAF). This strategy allows donors to allocate a lump sum of funds to be distributed to various charities over multiple years. This works especially well if the individual has earned a higher-than-average income and is looking to offset the increased income right away.

Donate your Required Minimum Distribution (RMD). Although you don’t have to take RMDs until you’re 72 years old, owners over age 70 ½ can transfer up to $100,000 tax-free directly from their IRA to a qualified charity. Keep in mind that charitable contributions can only be made from IRAs, so you may need to first perform a rollover if you’re looking to use funds from a non-qualifying account.

Take Deductions Early

The other side of the business planning strategy is accelerating expenses that can be used as deductions in the current year. For example, if you know you will be hiring an outsourced vendor in January, you may request to pay for their services in advance in order to deduct them from your current year’s income. Other deductions could include interest payments or medical deductions.

Tax-Loss Harvesting

Tax-loss harvesting is another strategy that can reduce the taxes you owe. This strategy involves intentionally selling investments at a loss to offset (a) capital gains that resulted from selling securities or (b) up to $3,000 in non-investment income. However, there is a limitation to this practice. In an effort to prevent taxpayers from taking advantage of this perk, the IRS implements the “wash-sale” rule which nullifies a loss claim if the same or nearly identical security is re-purchased within 30 days of the sale. Tax-loss harvesting won't eliminate what you owe for this year's taxes, but it can help offset what you owe on your taxable investment accounts.

Like with any plan worth implementing, preparation is essential—especially when time-sensitive moves and deadlines are involved.

 

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