Many people put off thinking about their taxes until right before the tax filing deadline. However, the end of the year is a great time to start thinking about how you can minimize your taxes. In fact, what you do now may have a significant impact on the tax return you file in a few short months.
Year-End Tax Planning Moves
Here are some ways you can save on your taxes before the calendar flips to the beginning of the new year.
1. Contribute to Retirement Accounts
Now is a great time to contribute to your traditional retirement accounts, including your TSP, 401k, or a traditional IRA. Any money you contribute to a traditional retirement account is made with pre-tax contributions, meaning your contributions are made before the money has been taxed. This reduces your taxable income this year and sets you up for a brighter future.
If you can do so, you can increase your contribution amount from your TSP or 401k plan. Another option is starting an IRA, which can be done at many banks and investment firms.
One of the benefits of contributing to an IRA is the ability to make contributions beyond December 31st. You can contribute to an IRA up until the tax deadline (April 15th in most years). Just be sure to designate the year in which you want your contributions to count.
How to Get Started:
You can log into your TSP or 401k account and change your contributions within your account. Most organizations will automatically stop contributions if you run up against the contribution limit, so you shouldn't need to worry about exceeding the contribution limit.
If you already have an IRA, you can contribute up to $6,000 in 2020, or up to $7,000 if you are age 50 or older. If you don't already have an IRA, now is a great time to open one. Simply contact your favorite investment company to get started. Here are some good places to open an IRA if you don't know where to start.
2. Make Charitable Contributions
Many charities and non-profit organizations rely upon donations to fund their operations. The good news is that donations to many of these organizations are tax-deductible. This is a great time to give money, gifts, or other donations to organizations you support.
If you don't have extra cash, you can always donate serviceable items that you no longer need. This could include clothing, sports equipment, furniture, tools, electronics, and more.
How to Get Started:
Spend a weekend going through your closets, attic, basement, or garage to find items that still have life in them but are no longer needed in your household. Take these to an organization that can put them to use or sell them to fund their operations. Be sure to get an itemized receipt to file with your tax return next year.
3. Plan Itemized Deductions and Certain Purchases Before the End of the Year
You may be able to make some payments early, locking in the expense for the current calendar year. For example, if you itemize your taxes, paying your January mortgage bill may allow you to lock in the interest payment for this year's tax return. The same goes for paying your property taxes early in some states.
If you or your spouse own a small business, then you can pay your Q4 estimated taxes or make purchases for your business before the year's end.
How to Get Started:
Review your finances to see if it makes sense to accelerate any expenses, then take action accordingly.
4. Max Out Health Savings Account Contributions
Health Savings Accounts (HSAs) are tax-advantaged savings accounts designed to help their owners pay for health care expenses. Contributions are tax-deductible in the year they are made and grow tax-free, much like contributions to a traditional IRA. In addition, the funds aren't taxed if they are used for qualified healthcare expenses, which is more like a Roth IRA. In other words, you get the best of both worlds with tax-deductible contributions and tax-free qualified withdrawals.
The downside is that HSAs are only available to those who have a qualifying high-deductible health insurance plan. Tricare plans are not eligible for HSAs, so you wouldn't be able to contribute to an HSA unless you have a qualifying plan through a qualifying civilian healthcare plan.
How to Get Started:
Review your year to date contributions if you have a healthcare plan that is HSA eligible. Try to contribute as much as possible, up to the annual HSA limits.
5. Defer Income if Possible
Some people have flexibility with how and when they take certain payments. For example, if you are a retiree, you may be able to postpone retirement account withdrawals to avoid taking a tax hit this year. Just be sure to meet your Required Minimum Distributions.
If you are a small business owner, you may be able to postpone certain income types from your business, including a bonus.
How to Get Started:
Review your situation to see if there are any ways you can defer income until next year.
6. Sell Losing Stocks and Equities
The IRS allows investors to take a tax write-off when they sell investments at a loss inside a taxable account. This is referred to as tax-loss harvesting. If you have more losses than gains in a given year, you can use up to $3,000 per year to offset ordinary income. Any additional losses can be carried forward to offset future ordinary income.
There are some caveats, however. You cannot buy the same security you sold for a loss within 30 days of selling it. This is referred to as the wash-sale rule. However, you can purchase a similar investment. It's a good idea to read further about tax-loss harvesting and the wash-sale rule to ensure you get this right.
How to Get Started:
Take a look at your investments to see if there are any losses you can cut now.
In Summary
These are only a few ways you can save on taxes before the end of the year. As always, taxes are different for everyone, so it's a good idea to review these in greater detail to see which of these apply to your situation. If you have further questions, consult with a tax professional to help guide you. A short consultation may end up helping you save a substantial amount of money on your taxes.
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