We’re a few short months away from the end of the year. Pretty soon it will be a new year and tax season again. This leaves you with a couple of options. One is to put things off till January or do the last-minute rush in April. The other, is to start planning now and make the most of your tax savings. Plus the end of the year is a great time to knock out a bunch of financial stuff all at once. Here are a few year end tax tips to get you started.
The best place to start is with last years tax return. If you haven’t had any major life changes this year, it will be painless – just use the same information. But not everyone is that lucky.
Many life changing events like a marriage, divorce, new baby, or new home can all trigger potential credits or deductions. These are all opportunities to save on taxes. Take the extra time to sort through everything.
If you’re not sure what qualifies as life changing to the IRS, grab this tax preparation checklist to simplify the process. Also, it’s never a bad idea to see where you stand. Get an early estimate from your accountant or run the numbers through your favorite tax software. That way, you have time to scrounge up the money for any taxes you owe.
Lastly, adjust your withholding. If you have too much or not enough taken out of your paycheck, make the change. You can argue the benefits of owing taxes over getting refunds. Regardless, it’s time to make an adjustment if either number is always too big.
Boost Your Retirement
The cutoff for employee retirement contributions, like to your 401k or 403b, is December 31. Get that extra money in now while you can. In the end, it’s a great addition to your retirement savings and it reduces your taxable income.
It’s also a great time to make adjustments for next year. Now is the perfect time to increase your 2014 contribution amount if you can swing the extra retirement savings. We recommend having contributions set up as a percentage of your income, say 15%. That way, when you get a raise or bonus you automatically boost your savings too. This is an easy way to set yourself up for long-term success.
IRA’s are a different story. The cutoff for IRA contributions ends on April 15. Why the difference? The IRS allows you to backdate IRA contributions up till the tax filing date. That leaves a lot of time to procrastinate. If you wait too long you just might forget. There are several places to open an IRA today (I use TD Ameritrade).
Get everything set up now, so you’re not rushing at the last-minute when taxes are due. Just make sure to select the right tax year when putting money in your IRA.
Charitable giving is always a hot topic around this time of year. From a tax standpoint, you only benefit if you itemize your deductions each year. If you fall into this category or think you might, it’s a good time to start cleaning out your closets.
Charitable deductions include money and items (at fair market value). That means clothes, toys, cars, furniture, or anything really. As long as the organization takes it, there’s a chance you could get a tax deduction from IRS. And if not, it’s still a good thing to do.
There is one stipulation. The donation must be made to a qualified organization. If you aren’t sure your charity of choice qualifies, just ask. Or, use the IRS Select Check Tool to search for qualified organizations in your area.
An end of the year portfolio review gives you a chance to make changes, rebalance, and lower your taxes at the same time. Tax harvesting is an easy way to lower your capital gains tax. It offsets capital gains by selling investments for a loss. If you are planning on selling a big losing investment, now could be the time to do it. But remember the wash sale rule. You don’t want to get stuck with a tax bill for such a simple mistake.
Be aware, cost basis rule changes now require your brokers to report the purchase and sale price of most investments. That includes stocks, bonds, ETFs, and mutual funds. Why is this important? When you sell a losing investment to offset capital gains, or any investment really, it helps to know which cost basis method to use. You could be left with a higher tax bill if you choose the wrong one.
Lastly, if you aren’t sure about something, talk to your financial or tax pro now and get everything squared away before year-end. Once January 1 rolls around, it will be too late.