It’s the most wonderful time of the year! Time to look back on the year that was, and start planning for what is about to be. But before you get too introspective, it is time to do some last-minute tax planning. I know everyone loves talking about taxes, so consider this your holiday gift from me to you!
Everything I am about to discuss won’t pertain to everyone. That said if even if one of these thoughts helps you out, I consider it a win in my book.
11 End of Year Tax Tips:
1: Contribute the maximum to your 401(k)
You still have time to contribute the maximum to your 401(k) and save a few dollars on taxes. If you haven’t hit the IRS limit of $19,500, with an additional $6,500 if 50 plus, then consider doing so. It is a great way to both save taxes and put you in a better spot for retirement.
2: Do charity charging this year
Charge any year-end charitable wishes now. You get the deduction in the year you charge them, even if you pay your credit card bill in the New Year. It is a great way to take advantage of lowering your taxes while giving to a charity, and not having to make a payment until next year.
3: Tax-loss harvest
Tax-loss harvest on your investments. Essentially, what this means is if you have investments that are at a loss, now would be a good time to realize those losses and use them to offset gains on your taxes. Additional bonus if there are some gains you want to realize as well and can use these losses to offset them.
4: IRA to Roth conversions
Do those IRA to Roth conversions now. If you have been considering converting your IRA into a Roth now may be a good time. You should have a good sense of your taxable wages by now. With a little tax planning, you can do some great analysis to determine if, and how much, to convert while still keeping you in a similar tax bracket.
5: Low basis stock
Low basis stock concerns. This is a tricky one for most. Lots of times individuals are stuck with a low basis in a highly concentrated position. With year-end approaching now is a good time to consider two ideas. One, you can sell some positions this year when you know what the tax rates are. In doing so it is easier to control the capital gains situation. Two is one of my favorite strategies in a Donor Advised Fund. This allows one the ability to simply gift these low basis holdings to a DAF, receive the charitable deduction on the full amount, then diversify and use it as a charitable fund for the future.
6: RMD age? Do a qualified charitable distribution
Do a qualified charitable distribution if RMD age. This nifty little strategy allows those who are forced to take an RMD to donate that required minimum distribution to a qualified charity, as long as the amount is $100,000 or less. This takes any taxability out of these funds one is forced to take.
7: After-tax contributions to your 401(k)
Contribute after-tax dollars to your 401(k). If you have already hit the IRS 401(k) contribution limit, fear no more. If your company allows, you can contribute a substantial amount after tax as well before year-end. In doing so it will allow you the ability to then take those dollars and convert them to a Roth IRA, regardless of earning limits. It is a strategy called Mega-Backdoor and one I absolutely love!
8: Hire your children
For those business owners out there consider hiring your children to do some work for you. You can pay them at a substantially lower tax rate and use those funds to pay for child expenses you occur. Heck the first $12,550 you pay them is taxed at 0%.
9: Or, hire your spouse
Again, for those business owners out there consider having your spouse on the payroll (if they aren’t working elsewhere). This will allow you to contribute another $19,500 for them pre-tax into your 401(k). Effectively doubling the amount, you can defer for retirement and taxes.
10: Max out HSA Accounts
Maximize those Health Savings Accounts (H.S.A). Possibly the best thing out there, as they let you contribute pre-tax while taking distributions tax-free. If you haven’t contributed the maximum allowable amount ($7,150 with an additional $1,000 if 55 or older), then consider doing so before year-end. Great way to lower your taxes and put money away tax-free you will undoubtedly use in the future.
11: 529 Contributions
Consider making a 529 contribution before year-end. Most states allow a state tax deduction for contributions made to a 529 plan. Check your state rules first. For instance, Pennsylvania allows for $15,000/child ($30,000 if married) to be deducted against your state taxes if a contribution is made.
I hope some or all of these end of year tax tips and strategies may be beneficial to you. One of the best ways to stay on top of these strategies and make sure no surprises is to consult with your CPA. Remember, here at Diversified, LLC we believe in everything under one roof. So if you have any tax needs don’t hesitate to reach out and we will put you in touch with our team.
Enjoy this special time of year and as always stay wealthy, healthy, and happy.
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