Five tax moves you need to make before the end of the year
While the deadline for paying the taxes for the current year is usually not until April of the following year, it is a good idea to be thinking about them before the end of the calendar year. Yes, this time of the year is mostly about the holidays and spending time with your family, but if you take a little bit of time to make some end-of-the-year tax moves, you can potentially lower your tax liability, which translates into you owing less by the tax deadline.
Of course, when making end-of-the-year tax moves, you need to be sure you are doing it legally and choosing the options that work best for your individual financial plan. While everyone’s end-of-the-year tax strategy looks different for their unique circumstances, there is some general advice everyone should consider following.
Five tax moves to make before the end of the year
- Max out your retirement contributions — Many people invest in a 401(k) and/or an IRA to fund their retirement nest egg. These accounts have annual deductible contribution limits. As of 2020, you may contribute a maximum of $19,500 annually to a 401(k) (plus an additional $6,500 if you are 50 or older). You may contribute a maximum of $6,000 annually to an IRA (plus an additional $1,000 if you are 50 or older).
For 401(k) and traditional IRA accounts, these contributions are made with pretax dollars. This means you do not pay taxes on your contributions now but you do when you withdraw them in your retirement.
Maxing out your contributions before the end of the current year lowers your tax liability now.
- Contribute to charitable organizations — Charitable donations have always been tax deductible, but there are limits to how far this goes. However, in 2020, the IRS temporarily lifted suspension on limits of charitable contributions for the tax year. This means 100% of AGI can be deducted for qualified contributions in place of the standard 50%.
Contributing now can help you lower your tax liability while providing support for a worthy cause that could use help during these difficult times.
- Use your FSA funds — If your employer provides Flexible Spending Account (FSA) contributions as a benefit, you can use it before the end of the year to pay for certain out-of-pocket medical costs. At the end of the year, most FSA accounts reset, although some employers allow employees to carry some of the balance into the next year.
Use up your funds for any health care needs you may still have, such as certain medical supplies that are FSA eligible or for scheduling overlooked appointments, such as an eye exam.
This does not help with your taxes, but not using all your available FSA funds is basically like leaving “free money” on the table.
- Sell underperforming investments — In an act known as tax-loss harvesting, you can sell underperforming investments if there is a greater advantage to lowering your tax liability versus the expected low returns from the investments. There are some restrictions on how this is done, so be sure to contact your financial advisor for assistance.
- If you own your own business, delay income into next year, if possible, and pay expenses early.
Talk to a ProVise CFP® professional about your taxes and your financial plan
Having a strategy for paying your taxes and minimizing your tax liability is an important part of your financial plan. This can be difficult to manage on your own when you do not have the time or expertise to navigate the complex financial world. At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals do.
We can work with you to get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a personalized financial plan. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about your financial plan? Contact ProVise today to schedule a complimentary consultation.