Optimize your year-end tax planning to reduce liabilities by understanding key strategies and changes in the law.
At a Glance
- Deferring income can delay tax payments.
- Accelerating charitable contributions maximizes deductions.
- Consider investment “loss harvesting” to offset gains.
- Maximize contributions to retirement accounts.
Strategic Income and Deductions
Effective tax planning at the year’s end can help minimize liabilities. Deferred income strategies, particularly useful for self-employed individuals, delay tax payments to the next fiscal year. By accelerating deductions—such as making charitable contributions before the end of the year—you may reduce current-year taxable income.
Account for potential Alternative Minimum Tax (AMT) implications, which might negate some traditional deductions. A proactive review of financial documents and changes in tax laws is essential to adapt your strategies accordingly.
Maximizing Investment Opportunities
Taxpayers can utilize loss harvesting by selling investments at a loss to offset taxable gains, effectively managing their portfolios and tax implications simultaneously. Reviewing opportunities for converting traditional IRAs to Roth IRAs could provide long-term tax advantages, especially if tax rates are expected to increase.
According to Mark R. Parthemer, Managing Director, Private Client Planning at TIAA, during periods when tax rates are stable from one year to the next, taxpayers are often encouraged to accelerate deductions into the current tax year and defer income into the next.
Maximizing funding to tax-deferred retirement accounts like IRAs and 401(k)s to reduce taxable income and benefit from potential employer matches is another strategy from Mark R. Parthemer.
Consultation and Ongoing Planning
Working with a tax professional ensures tailored advice aligns with recent legislative changes and personal financial circumstances. Strategies such as qualified charitable distributions can decrease taxable income, while careful management of income and expenses aids in effectively adjusting tax withholdings.
“Today’s historically low AFR rates make this a good time to consider the advantages of intrafamily loans or to refinance an existing note that may have a higher interest rate,” – according to Parthemer.
Incorporating year-end adjustments, including the use of flexible spending accounts, minimizes potential financial loss due to the use it or lose it rule.
