It is hard to believe that we are over halfway through the year! Many people wait until December to think about year-end tax planning and in many instances, that is too late. Others complete some seemingly innocent tax planning that should have waited until after year-end and creates a headache come tax time.
A tax preparer or tax software is an excellent resource to prepare and file tax returns. Tax preparers can help answer specific tax questions and assist with tax forms. Many people think that their tax preparer is also completing all of their tax planning. In reality, a tax preparer’s job is usually to take the information that you provide and accurately prepare and file your return. Tax preparers will provide valuable insight as to the specific rules and implementation of opportunities that are presented to them but rarely be the one to point out those opportunities and assist with mid-year planning. That is because it is often not their job to do so.
If you work with a financial advisor who offers comprehensive financial planning, they should be able to assist with helping you find opportunities that may save you money. They are usually better equipped to complete tax planning because they know your financial planning situation and long-term goals. The following is a list of some things you may want to consider implementing to save money before the end of the year.
Tax planning opportunities to think about before the end of the year:
You may want to contribute more to your 401(k), 403(b) or other workplace retirement plan. Depending on your current and future situation, you may want to change your contributions from pre-tax to Roth or vice versa.
If self-employed, you could consider establishing and contributing to a retirement plan. There are some types of self-employed retirement plans (such as a Solo 401(k) and SIMPLE IRA) that must be opened prior to year-end.
If you have unrealized investment losses, consider realizing them to offset any gains and/or write off up to $3,000 against ordinary income.
It can be beneficial to convert pre-tax funds to a Roth IRA when you are in a low enough marginal tax bracket where it may benefit you long-term.
If you have an inherited IRA, you may have some options on how to take your required distributions and can capitalize on that by trying to minimize overall tax liability from distributions.
Depending on your education goals and cash flow, it may make sense to make a 529 plan contribution in order to receive a state tax deduction. Only contributions made by the end of the calendar year can reduce that year’s tax liability.
If you have gains in a taxable account, determine if you qualify for 0% long term capital gains rates. If you don’t, determine if there is a way you can by increasing your pre-tax contributions or reducing additional gains or income.
If you are charitably inclined, there are several strategies that can help reduce your tax liability based on your situation.
In addition to looking for opportunities to reduce your tax liability, it is also important to make sure you are avoiding any penalties. Now is a good time to make sure you are paying enough in both federal and state tax (through withholding or estimated tax payments) so that you will not have to pay an underpayment penalty to the IRS. Even if you missed tax payments for prior quarters, there are strategies you may be able to use before year-end to avoid a penalty. Additionally, if applicable, you should be sure to take any required minimum distributions (RMDs) from your retirement accounts.
There are other opportunities, such as making an IRA or HSA contribution, that you can wait to implement until after the end of the year. In some situations, it is best to wait when you can. For example, it may be best to wait until after the end of the year to make IRA contributions since deductible IRAs and Roth IRAs have an income limit. If you make a contribution and end up exceeding the limit, you will need to undo the contribution or could owe penalties.
At Autumn Financial Advisors, LLC, we can help you to identify and implement tax planning opportunities to minimize your tax liability. It’s not too late to complete tax planning strategies for this year. Schedule a call to learn more about what we offer and how we may be able to help you.
Though we offer tax planning guidance, we are not tax professionals and do not file client’s tax returns or provide specific tax advice. Complicated tax planning strategies should be discussed with a qualified tax professional. We will coordinate with CPAs or tax preparers when necessary to help with tax planning opportunities discussed.
