Year-End Tax Strategies for Individuals

Here are a few tax tips you might consider before the end of the year, which could potentially reduce your taxes when Uncle Sam comes knocking in April. Generally, you want to lower income and accelerate deductions now if you expect next year’s tax situation to be similar to this year’s.

1. Donate to charity: The IRS requires receipts for charitable contributions made in cash. Contact organizations you have donated to in order to obtain written receipts that reflect the actual dollar amounts of your donations. The same also applies for non-cash contributions.
2. Spend money on your house: The federal government offers a number of energy incentives that can reduce your taxes. For example, tax credits for solar energy systems are available at 30% through December 31, 2019. The credit decreases to 26% for tax year 2020, drops to 22% for tax year 2021 then expires after that.
3. Make an extra mortgage payment: For a larger itemized deduction in this year’s taxes, consider making January’s mortgage payment in December. Check with your mortgage holder to determine what the last date to do that will be.
4. Prepay your property taxes: If you are able to prepay the next installment of your property taxes, make that payment in December. Note: If you have been subject to the Alternative Minimum Tax, you should forego this strategy since real estate taxes are not deductible in computing this tax.
5. Pay your estimated taxes in December: Instead of paying estimated state income taxes on January 15, consider making that payment prior to December 31 to get a deduction on this year’s taxes.
6. Increase your withholding: If you receive a W-2 from your job and you expect your withholding to be less than your tax liability, you may want to increase your withholding for the last few months by filing a form W-4 with your employer. This may eliminate or reduce any penalty for underpayment of estimated tax.
7. Sell losing investments: If you have securities with unrealized losses, you might want to sell them to offset capital gains. Net losses are capped at a certain limit per year. Any excess loss will be carried forward to future years. Check with the IRS for these limits. If you have already sold securities at a loss, you may want to consider selling other securities that you own at a gain. Any gains not in excess of the loss will have a zero tax.
8. Give your kids a gift: If you give an appreciated asset to dependent children, some of the unearned income will not be subject to income tax, with any excess taxed at the parent’s rate. Gifts up to a certain amount are exempt from gift taxes. Check with the IRS on what these limits are each year. Dependent children are age 19 or less or, if a full-time student, age 23 or less.
9. Zero percent capital gains: If you give an appreciated asset to independent children or other family members, the recipient can typically avoid paying taxes on it if they are in the 10% or 15% income tax bracket. (Gift limitations apply; please see #8 above.)
10. Put money into a retirement account: Contributions must be made by the tax filing deadline in April to be claimed on the prior year’s taxes. Consult IRS guidelines for maximum contributions. For both Roth and Traditional IRAs, there must be earned income to be eligible for the contribution.
11. Make the most of your FSA: If you participate in a Flexible Spending Account or a Dependent Care program at your job, remember that these are “use it or lose it” programs. If you don’t submit eligible expenses by year-end, or by the plan’s cutoff date, those funds in your account will be lost forever.
12. Protecting your Social Security benefits from being taxed: If you are receiving Social Security benefits and receive wages, self-employment income, interest, dividends, and any other taxable income, your Social Security benefits may be taxed. Consider asking your employer to increase withholding of state and local taxes to pull the deduction of those taxes into this year (but only if doing so won’t cause an Alternative Minimum Tax problem).
13. Organize your financial records: Good record keeping can really pay off at tax time. Not only will it make your tax preparation easier and faster, but you might uncover enough tax deductions to be able to itemize. More importantly, the IRS will require receipts and other records in the event of an audit.

Not all of these strategies will apply to your particular situation, but you’ll likely benefit from many of them. Remember that tax considerations are only one of the factors you should review before implementing any strategies. If you have questions regarding your specific situation, please schedule an appointment with your Senior Tax Advisor as soon as you can.

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