As the calendar year draws to a close, financial tasks can be easy to postpone. Still, this is an important time to examine your individual tax position and identify planning opportunities that may no longer be available after December 31.
Taking a proactive approach before filing season can ease stress, help prevent an unexpected balance due, and allow you to consider tax-saving strategies while there is still time to act. Whether your financial circumstances changed significantly this year or remained steady, a thoughtful year-end review can help you enter the new year better prepared.
Check Your Withholding and Estimated Payments
Your tax withholding should reflect your current financial circumstances, but many developments during the year can affect the amount of tax you ultimately owe. Starting a new position, receiving a pay increase, retiring, earning investment income, beginning self-employment work, or experiencing changes in your household can all alter your tax picture.
When too little tax has been withheld from your wages, you may face a balance due when you file your return. On the other hand, excessive withholding means more of your money has been sent in throughout the year than may have been necessary.
It is equally important to review estimated tax payments if you receive income without automatic withholding. This can include income from self-employment, rentals, investments, or retirement accounts. An insufficient payment may result in a tax bill and potential penalties, so a year-end review can help determine whether an additional payment is appropriate before the year closes or ahead of the final estimated-tax due date.
Review Retirement Plan Contributions
Year-end is a useful time to look at progress toward your retirement savings goals. Contributions to employer-sponsored plans, including 401(k) and 403(b) accounts, generally need to be made through payroll deductions before the end of the calendar year.
If you have remaining pay periods, increasing your retirement-plan contribution may reduce taxable income while helping you build additional retirement savings. It is also a good time to confirm that you are contributing enough to receive any employer match that is available to you.
A Roth IRA conversion may also deserve consideration for certain taxpayers before year-end. Although a conversion generally creates taxable income in the year it occurs, future qualified Roth IRA withdrawals may be tax-free. Because the potential outcome depends on individual circumstances, this choice should be evaluated carefully.
Use Health Savings and Flexible Spending Accounts Wisely
For individuals covered by a qualifying high-deductible health plan, a Health Savings Account, or HSA, can provide meaningful tax advantages. Eligible contributions may be deductible, account earnings may grow tax-deferred, and withdrawals used for qualified medical expenses are generally tax-free.
If you have not yet reached the applicable contribution limit, you may still have an opportunity to add funds before the relevant deadline. Reviewing your HSA balance and contribution activity can help you decide whether an additional contribution makes sense.
Also take time to examine your Flexible Spending Account, or FSA. Many plans impose use-it-or-lose-it rules, which can mean unused funds are forfeited when they are not spent within the period allowed by the plan. Since employer plans differ, checking your available balance now may help you avoid losing funds. Open enrollment can also be an appropriate time to confirm that your FSA election remains suitable for your household's anticipated needs.
Assess Investments and Income Timing
When investments have declined in value during the year, tax-loss harvesting may be worth exploring. Selling an investment at a loss can potentially offset capital gains, and excess losses may, in some situations, offset a limited amount of ordinary income.
Any decision to sell should take your longer-term investment objectives into account. You should also understand the IRS wash-sale rules, which may reduce or eliminate a tax benefit when substantially similar investments are purchased again too quickly.
The timing of income and deductible expenses can also affect your tax outcome. Depending on your particular circumstances, it may be beneficial to accelerate certain deductions or defer income into the following year. In other cases, accelerating income or delaying deductions may be the more suitable approach. The appropriate strategy depends on your individual tax situation.
Coordinate Charitable Giving
Charitable giving often increases toward the end of the year, and advance planning may help improve the available tax benefits. If you intend to make donations, retain receipts and written acknowledgments for each gift.
In some situations, contributing appreciated securities rather than cash may be worth considering. Taxpayers who itemize deductions may also benefit from grouping several years of planned charitable gifts into one year.
To include a charitable gift on this year's tax return, make sure the donation is completed by year-end. Keeping appropriate records now can make it easier to substantiate gifts during tax filing season.
Complete Required Minimum Distributions
If you are required to take Required Minimum Distributions, or RMDs, make certain they are completed before the end of the year. Failing to take an RMD can lead to penalties, making this a critical year-end item for retirees to address.
For individuals who wish to direct retirement funds to charity, a Qualified Charitable Distribution, or QCD, may be an option. Eligible taxpayers can make donations directly from an IRA, potentially satisfying all or part of an RMD while receiving favorable tax treatment.
Prepare Records for the Coming Tax Season
If you are saving for education through a 529 plan, consider reviewing contributions before year-end. Certain states provide tax benefits for qualifying contributions, and even modest additions can support education savings over time.
It is also helpful to begin gathering tax records before January arrives. Useful documents may include charitable giving receipts, mortgage interest statements, property-tax records, investment statements, childcare expense information, self-employment income documentation, and medical expense records. Organizing these materials early can make filing season more manageable and reduce the chance that deductions or credits will be missed.
The final weeks of the year can pass quickly, and many individual tax-planning choices must be completed before the calendar turns. Reviewing withholding, retirement contributions, health accounts, investments, charitable gifts, required distributions, education savings, and tax documentation now can make filing season smoother and help minimize unpleasant surprises.
Continental Tax Planners can help you review your year-end tax situation, understand the available options, and consider planning opportunities before the year ends.