Tips for Your End of Year Tax Strategy
- Author: Chris Remington
- Posted: 2024-07-31
Engage in Tax Loss Selling
Since the stock market has been on a tear over the last decade, you may likely be sitting on some capital gains. This means that, if you have sold any stocks at a profit during the course of the preceding year, you will owe the IRS money. Capital gains can be offset by your less successful investments. In other words, your tax bill can be lowered when you take a loss on a security where you were less successful owning.
Every investor has difficulty admitting that they were wrong and taking a loss. However, tax-loss selling will save you money on your tax bill. It is best to get a slight jump on everyone else who is selling the last couple of weeks of the year because that will likely mean that there will be downward pressure on the stock. Cut your loss while the going is less bad so you can take it off your taxes either as a loss or to offset against.
Maximize Your Retirement Contributions
Your contributions to your retirement account are from your pre-tax earnings. The Tax Code allows you to contribute up to $19,000 to your 401(k) on a yearly basis. To the extent that you maximize your contributions, you are able to reduce your tax bill by thousands of dollars. If you have not maxed out in your retirement account, take the opportunity to do so by the end of the year. You can also contribute up to $6,000 to your IRA and receive tax benefits for it. While this is not "free money," you will save on your taxes and still have the money saved.
Up Your Withholding
Some taxpayers have a nasty surprise waiting for them on April 15 when they tabulate what they owe to the IRS. If you have underestimated by too much, you will end up not only owing to the IRS taxes, but there will be penalties on your taxes as well. You should sit down late in the year to figure out where you are tax-wise. If you find out that you are on track to have a big tax bill, you can either make an early payment to the IRS or up your withholding. This will catch your tax payments up with your liability and minimize what you owe to the IRS in the next year. Paying a penalty when you do not have to is like throwing away money and you can avoid with the proper year-end planning.
Estimate Your Itemized Deductions
Congress recently increased the standard deduction to over $12,000. At the same time, they reduced the amount that you can take as a deduction for state and local taxes. Thus, you should have an idea at the end of the year whether you will take the standard deduction or you will itemize your deductions.
This makes a difference in how you will plan your year-end spending. Some people will maximize their spending at the end of each year if it is deductible from their taxes. However, if you cannot get close to the standard deduction, there is no need to spend the money now and you should wait to spend the money next year.
As a result, you should tabulate your itemized deductions before December begins in order to know how much you need to spend or whether you need to spend at all. To the extent that you can move up spending to increase your deductions, you should move expenses up to the current year because it is always better to take the tax deduction now as opposed to waiting until the next year.
When you sit down to do your taxes in April, you never want to be taken by surprise by the unexpected. Planning ahead in December will reduce the chances that you can end up with a large bill payable to Uncle Sam.
