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As the year-end approaches, individuals and businesses must engage in thoughtful tax planning. This time is great for adopting tax strategies to save money and build a good financial start for the next year. Effective tax planning goes beyond just reducing tax liabilities; it involves making informed decisions that align with and enhance your long-term financial goals.
This article provides a comprehensive guide to practical and efficient year end tax strategies. We will walk you through essential steps to optimize your tax position during this time. Let’s begin.
What to Consider by Year-End
Consider the following strategic year-end tax tips to shape the new year. Here are important things to review:
1. Your Investment Portfolio
Review and, if needed, rebalance your investment portfolio to match your financial goals. This helps to increase gains and minimize losses. If some investments need to perform better, consider selling them. This strategy, known as tax-loss harvesting, can help offset gains in other areas and potentially lower your overall tax liability.
However, when using tax-loss harvesting, watch out for the wash-sale rule. This rule means if you sell a stock at a loss for tax benefits, you can’t buy the same or a very similar stock again within 30 days before or after the sale. If you do, you won’t be able to use that loss to reduce your taxes.
2. Charitable Giving Strategies
Different gifts have varied tax impacts. Cash donations to charities can lower your taxable income by up to 60% of your earnings. Donating stocks or other investments you’ve had for a while can be even better for taxes. You avoid paying tax on their increase in value and can deduct their worth by up to 30%. If you’re over 70½, you can give up to $100,000 from your IRA to charity. This is part of your required yearly withdrawal and might not be taxed, saving you money.
3. Estimated Tax Payments
If you earn a lot and pay taxes every quarter, you can plan your payments to avoid extra interest charges. Decide which is better: paying 110% of last year’s taxes or 90% of this year’s estimated taxes. When interest rates are high, consider putting extra money into short-term, safe investments that guarantee your initial amount (principal) for potentially better returns.
5 Important Tax Planning Actions To Take Before Year-End
Here are five key end of year tax planning steps to take to reduce your tax obligations and set the stage for a financially sound 2024.
1. Review Your Paycheck Withholdings
To prevent unexpected tax bills, update your W-4 form to control the tax amount deducted from your pay. Use the IRS Withholding Estimator online to check if it’s correct. If you need a change, submit a new W-4 to your employer. Also, make sure your state tax withholdings are up to date.
2. Maximize Retirement Account Contributions
Maximize your savings in retirement accounts for tax benefits. In 2023, you can put up to $22,500 in a 401(k); if you’re 50 or older, you can add $7,500 more. For IRAs, the limit is $6,500, plus $1,000 extra for those 50 and over.
Contribute at least the amount your employer will match in your 401(k). Note that 401(k) contributions must be made by December 31, while IRAs allow contributions until the tax filing deadline in April.
3. Address Required Minimum Distributions (RMDs)
If you are 73 or older, take your RMDs from traditional retirement accounts by December 31. Failure to do so may result in a 25% excise tax on the amount you should have withdrawn. Consider a QCD if you don’t need the cash flow and want to contribute directly to a charity. QCDs are limited to $100,000 annually and can be initiated as early as 70 ½.
4. Explore Roth IRA Conversions
Evaluate the benefits of converting traditional IRA or workplace savings plan assets to a Roth IRA. While it’s a taxable event, Roth IRAs offer tax-free withdrawals in retirement. Consult a financial professional to determine if a Roth conversion aligns with your financial goals. Manage the impact of the dues by converting amounts that keep you within your current bracket, and consider spreading conversions over several years to minimize the tax liability.
5. Optimize Itemized Deductions
Consider “bunching” your itemized deductions to maximize their impact. Certain expenses like medical and dental costs, deductible taxes, mortgage interest, charitable contributions, and others can be itemized if they exceed a certain percentage of your adjusted gross income.
If you’re close to the standard deduction threshold, strategically time expenses to alternate between lean and fat years. Applying these tax tips before the end year can help you surpass the standard deduction amount, providing a larger write-off.
End-of-Year Tax Strategies For A Small Business
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Here are some essential financial planning tips for small businesses. They help to ensure your company is in the best position to reduce your tax liability:
1. Assess Your Business Expenses
Identify deductible expenses, such as office supplies, equipment purchases, business-related travel, and operational costs. Ensure that you have proper documentation for each expense to substantiate your claims. If you need new equipment or technology for your business, consider taking advantage of potential Section 179 deductions discussed below.
2. Equipment Purchases and Section 179 Deduction
Section 179 deduction lets you deduct the entire cost of qualifying equipment and software bought or financed during the tax year. This deduction is especially beneficial for small businesses investing in assets such as machinery, vehicles, or computers.
For example, investing in new kitchen equipment before December 31 could qualify for Section 179 deductions if you own a small catering company. However, remember that the deduction is subject to a spending cap of $1,160,000.
3. Bonus Depreciation
Bonus depreciation for eligible business assets allows you to depreciate a percentage of the asset’s cost in the first year, even if used. While Section 179 is subject to an annual spending limit, bonus depreciation can apply to larger purchases.
4. Employee Benefits
Explore ways to provide year-end bonuses or benefits to your employees in a tax-efficient manner. Consider contributing to employee retirement accounts or offering health savings (HSAs) or flexible spending accounts (FSAs). These contributions can be deductible for your business while providing valuable employee benefits.
Money Saving Year-End Tax Tips For Small Businesses
1. Small Business Tax Credits
Research and take advantage of available small business tax credits. These credits can significantly reduce your tax liability and may cover various areas, such as hiring certain employees, providing healthcare coverage, or investing in energy-efficient improvements.
2. Inventory Management
Evaluate your inventory levels and accounting methods. Proper inventory management can impact your taxable income. Consider strategies like the Last In, First Out (LIFO) or First In, First Out (FIFO) methods to minimize tax liability. If your business uses the FIFO method and the cost of goods has increased during the year, sell older inventory to reduce taxable income.
3. Defer Income or Accelerate Expenses
Explore opportunities to defer business income into the next year or accelerate deductible expenses into the current year. These small business year end tax tips can help manage your taxable income based on your current financial needs. If your business follows the cash method of accounting, delaying invoicing until the new year can defer income recognition, potentially lowering your current-year tax liability.
4. Review Retirement Plan Options
Contributing to a retirement plan benefits your financial future and can serve as excellent end of year tax saving tips for your business. Establishing a Simplified Employee Pension (SEP) IRA allows you to contribute up to 25% of an employee’s pay up to certain limits, and the contributions are tax-deductible for your business.
5. Consult a Professional Tax Advisor
Before delving into specific end of year tax tips for small businesses, it’s crucial to consult a professional tax advisor like Interactive Wealth Advisor who understands the intricacies of business owner financial planning. A tax advisor can assess your unique situation, recommend tailored solutions, and ensure compliance with ever-changing tax laws. Their expertise can prove invaluable in maximizing deductions and minimizing risks with end of year tax tips small business.
Maximizing Wealth Transfer
Looking ahead to 2024, think about using the annual gift exclusion. You can gift up to $18,000 per person ($36,000 if married) without tapping into your lifetime estate- and gift tax exemption. While these year end tax moves may not directly reduce your taxable income, they are a smart way to transfer wealth to your heirs tax-free. You can create an annual gifting plan or tie gifts to special occasions. This proactive year end savings move is not only a sound financial decision, but it also helps create a legacy of financial security for your loved ones. Take advantage of these tax-efficient opportunities as you enter the new year.