As millions of Americans rush to their accountants for help preparing and filing taxes, remember that nothing you do in January and February of the new year counts. Since the tax year ends on December 31st, to take advantage of any potential tax breaks, you need to act by the end of New Year's Eve day. During the final quarter of the year, it is important to start thinking about the smart moves you can make to reduce next year’s tax burden.
Defer Your Income
Bankrate suggests deferring income into the next year whenever possible to help lower your current year’s taxable income. For example, if it is standard practice for your firm to defer bonus payments into the new year, it is valuable to take advantage of this. If you are self-employed, you have more flexibility in sending out invoices and bills until after the new year has started to avoid paying taxes on that income this year. These are both good options if you had a stellar year with higher earnings and want to avoid a larger tax hit as a result.
Add to Your 401(k)
Regardless of your tax bracket, Forbes notes that it is a smart move to put as much money as you can into your company's 401(k) plan or similar retirement savings option. Most plan contributions are made before taxes are taken out, so you will have a little less income that the IRS can dip in to. As a bonus, you will have more money in your account to grow over a longer time period.
Review FSA Amounts
For those with a flexible spending account (FSA), you should review the balance as the year ends. That money doesn’t always roll over to the next year if you fail to spend it, so you could lose money you have contributed.
Check your employer’s grace period policy. Some employers offer a two-and-a-half-month grace period into the next year. In 2013, the US Treasury modified the Use-or-Lose rules, allowing you to carry over $500 in excess funds, but your employer must offer that option. If you have a balance in your FSA close to year-end, stock up on contact lenses, get new glasses, or visit the dentist to get that crown fixed.
Bunch Deductible Expenses
If you routinely deduct various items on your taxes, you are likely aware there are threshold amounts you must reach when itemizing on Schedule A. Medical and dental expenses, as an example, cannot be deducted unless they exceed 10% of Adjusted Gross Income (AGI). For taxpayers 65 and older, the threshold is 7.5% of AGI. Miscellaneous expenses must be 2% of AGI for filers at all age levels. To clear these thresholds, consider consolidating eligible expenses now by bunching them together. You can push them into one tax year to make maximum use of them.
Add to, or Open, an IRA
Finally, putting money into your 401(k) is not the only way to lower your taxable income. If you qualify, you can bulk up your retirement savings and potentially reduce your tax bill by funding an individual retirement account, or IRA. As a bonus, you can wait until April and the filing deadline to make contributions to IRAs for the previous tax year.
For more help with year-end tax planning and other financial planning needs, contact your Level Four financial advisor today!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. There is no assurance that the techniques and strategies discussed are suitable for all individuals or will yield positive outcomes.