Just before the end of the year, before the parties and celebrations consume our attention, let’s take one more look at how to lower your taxable income.
After all, proper year-end tax planning can help you at tax-time.
Today Is Not Too Late
Yes, it’s mid-December. But there’s still plenty of time to lower your taxable income and increase your potential tax benefits.
Don’t throw up your hands just because it’s so late in the year. Let this article move you to act. It’s right there within your reach.
Contribute to the Max
Whether you have an IRA, a 401(k), or even a Health Savings Account (HSA), deposit as much money as you can into these accounts before the end of the year. Not only will you catch a break by lowering your taxable income, but your future self will will be thankful that you are planning ahead.
Whether it’s through your employer or on your own (max IRA contributions are up to $5,500, and $6,500 if you’re over age 50), contributing to your retirement accounts is almost always a smart decision.
Contributions to your HSA for designated medical costs are also tax deductible. If you plan it right, you can save quite a lot while staying healthy. And you can help yourself pay down those high deductibles.
Bonus or Raise?
Because we all have to pay taxes on the income we receive, one of the ways to shift your taxable income to next year is to not receive it. Stay with me here.
If you defer part of your income until the new year, it won’t be counted as part of this year’s taxable income. Say, for instance, if you know that you’ll be in a lower tax bracket next year, it would be wise to defer some of your income late in the year until January’s payroll.
You could also negotiate with your employer about a raise for next year instead of a year-end bonus. The bonus would increase your taxable income for this year, and therefore increase your taxes. But a raise for next year would shield that income from this year’s taxes.
Depending on your financial situation, you do have the opportunity to reduce this year’s taxable income by claiming a loss on your capital investments.
Of course, what makes this decision tough is that you would have to cut ties with your under-performing investments and incur the loss. And that’s never easy. But if your capital losses outweigh your gains, Uncle Sam will let you use up to $3,000 to offset your regular taxable income.
It’s also important to note that, if you were to buy back the stock within 30 days of taking a loss, the IRS won’t let you claim the loss on your taxes.
Pile Up Your Business Expenses
Do you own a business? If you’re in a spot where you need to reduce this year’s taxable income, think about making your business-related purchases before the end of the year.
Make as many as you can. Be smart, but use your resources to make necessary expenditures so that you can claim them as deductions on this year’s taxes.
And if you feel that all of this information is wonderful and useful, but just a bit too late for your current situation, start planning for next year. You’ll never regret spending time on planning for your taxes.