Year-End Tax Tips

Right after the most wonderful time of the year comes everyone's least favorite season: tax season.

If you usually try to avoid thinking about taxes until after January 1, you may be missing out on the chance to save a little money. According to some tax experts, now is the time to take last-minute action if you want to reduce your tax bill in April.

Here are seven-year-end tax tips

1. Double-check your tax withholding and payments

“Before year's end, take a peek at your income,” advises Mary Kay Foss, a Certified Public Accountant with Sweeny Kovar in Danville, Calif. “Check your last pay stub and year-to-date income from brokerage accounts. Estimate December and compare the figures to what was on your last year's tax return. Also compare your withholding and scheduled estimated tax payments to last year.”

Why do all that? You want to be sure you have sent enough money to the taxman in 2013 and won't get stuck with a huge bill — or worse, penalties — in April.

Related Content: Common red flags that lead to IRS audits

If your income has increased significantly but your tax payments have not, it is time to either ask your employer to increase your December withholding or send in extra with your year-end estimated tax payment.

2. Update your contact information

If you have moved in the past year, you don't want to miss any deductions because of mis-routed mail. Make sure your address and contact information is current with all the organizations that may be sending you tax forms. These include investment firms, mortgage companies, and your previous employer if you have changed jobs since the move.

3. Be extra generous

“Year-end is a good time to go through closets and cupboards and donate unwanted items to charity,” says Foss. “Be sure to get a receipt and you'll get a tax deduction as well as a warm feeling.”

Foss also says seniors should be aware that their ability to make qualifying charitable distributions from their IRAs is expiring in 2014. According to the California Society of CPAs, the Emergency Economic Stabilization Act of 2008 allows those age 70 ½ or older to transfer up to $100,000 tax free from their IRA to a qualified charity.

The provision allowing the distributions expires in 2014, although Foss says Congress could extend it. Still, seniors who want to be sure they can make this generous gift should take action by December 31 to ensure they don't miss their window of opportunity.

4. Focus on lowering your AGI

If you are going to be buying your own health insurance through a government exchange in 2014, you may want to work on lowering your AGI. “Affordable Care Act subsidies are based on adjusted gross income starting in 2014, so keeping that low is a priority,” says Foss.

One way to reduce your AGI is by asking your employer to defer any bonus pay until January. For those who are self-employed, you can delay invoicing clients in December and make those payments due next month.

5. Prepay your taxes

Another way to lower your total tax bill is to prepay your 2014 property taxes and state income taxes, if applicable. Both are deductible on your federal income tax form and can help increase your deductions.

6. Unload your losing investments

If you are going to be stuck paying a capital gains tax this year, think about unloading your underperforming investments. You can use your losses to offset your gains — and if your losses exceed gains, you could even write off up to $3,000 from your annual income. Think you lost more than that? No worries, since excess losses carry over year to year.

7. Make your large purchases now

Finally, if you are planning to buy a car, boat or other major purchase, you might want to squeeze that in before the end of the year.

“The sales tax deduction goes away in 2014,” explains Foss. “If you deduct sales tax rather than income tax, don't plan on it for 2014.”

While Congress could reinstate the deduction, Foss says it is better to assume it will be gone rather than to assume it will be back.

The taxman cometh, but you can still take some last-minute action to keep your money in your pocket and out of Uncle Sam's hands. If you need help, Foss advises individuals to read the instructions on their tax forms, head to IRS.gov for resources, or get a referral to a trusted CPA from family and friends.

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FI Pilgrim
FI Pilgrim
6 years ago

Still boggles my mind that we are now incentivizing people to earn less so that their insurance rates will be lower. Just saying.

Scondor
Scondor
6 years ago
Reply to  FI Pilgrim

I think it’s more likely that if I’m within $17500 of the line, instead of finding a lower paying job or not taking a raise, I’d contribute more to a 401k to make my AGI drop and therefore qualify for lower insurance rates.

But I’m no pro, is this how it works?

If so, we’re incentivizing people in the $40,000-$57,500 salary range to save more for retirement, which I view as a positive.

Micro
Micro
6 years ago
Reply to  Scondor

That’s actually an interesting point. Hopefully that will be one of the routes people take and maybe we won’t have as many issues down the road. People will have actually saved enough for retirement.

Beth
Beth
6 years ago

Good tips for people in the U.S. 🙂

Not sure if Americans need to do this, but at the end of the year I look at how best to deploy my surplus savings from the year in an RRSP (for the tax deduction) or TFSA (to save the taxes on future growth). My friends who have kids look at how they can top up their kids’ education savings to save taxes and max out the benefit the government kicks in.

Beth
Beth
6 years ago
Reply to  Beth

There’s an article and e-book available here, if anyone is interested: http://www.financialpost.com/markets/news/Tips+2013/9268016/story.html

Money Saving
Money Saving
6 years ago
Reply to  Beth

I was just coming here to point this out. Another good way to help lower your taxes is setup an IRA (if you qualify) and consider 529 college savings plans.

Brandon
Brandon
6 years ago

While property taxes are deductible and state income taxes are deductible subject to AMT, neither lowers your AGI. They are below the line deductions.

Rachel
Rachel
6 years ago

As an FYI, you can’t lower your AGI by prepaying property taxes or state income taxes as those are itemized deductions. As such, they are deducted “below the line” and affect your taxable income computation but not adjusted gross income.

http://www.irs.gov/pub/irs-pdf/f1040.pdf

(I am a CPA, and it really bugs me when people push the itemized deductions when in reality the average income American just takes the standard deduction.)

Hoping to Adopt
Hoping to Adopt
6 years ago
Reply to  Rachel

I agree. If you don’t itemize your deductions, the “tax deductible” donations make no difference when you file your taxes. Lots of people do not understand this.

El Nerdo
El Nerdo
6 years ago

People understand this, it’s just that a lot of of us don’t have more than $6,000 per person on itemized deductions.

It’s a waste of time and energy to add all the piddly stuff, so we take the standard deduction instead. Yet people keep saying “you can deduct it from your taxes!” as if it was a guaranteed thing. Sure, that pile of old shirts I gave to Goodwill is going to make a huge difference come tax day! 😛

BD
BD
6 years ago
Reply to  Rachel

I had to go back and reread the article, because I didn’t catch that. But, upon rereading, I don’t understand your point…the article never said that prepaying those taxes lowered your AGI.
It said that it lowered your TOTAL tax bill, which is correct, providing that you itemize in the first place. (I guess the other question I have is “Are you allowed to prepay 2014 property & state taxes and take the deduction early in 2013?”)

Rachel
Rachel
6 years ago
Reply to  BD

Lots of my former clients that itemized would prepay their property taxes, but you need to be aware that by doing so you can run into being affected by AMT, which would reduce the benefit of prepaying. So it’s just something of which you would want to be aware.

The timing of when you recognize income & deductions is a common tax planning strategy.

Mrs PoP
Mrs PoP
6 years ago
Reply to  BD

I know for us, we are eligible to pay 2 years of property taxes within a single calendar year since the property tax bills are mailed out in November but are not due until April. But you want to be quite careful that having both in the same calendar year will give you the tax benefit, otherwise you forfeit the 1%/month prepayment discount you get for every month you pay in advance. (Pay by Nov 30, get 4% off…, Dec 31, 3% off…)

Brandon
Brandon
6 years ago
Reply to  BD

The original version of the article mentioned prepaying taxes to lower AGI. The Author has since corrected that statement.

BD
BD
6 years ago
Reply to  Brandon

Ah, ok. Thank you for the explanation! 🙂

imelda
imelda
6 years ago

Naive question – but you mention possible penalties in April. If I have mis-calculated my tax deductions (as I worry I may have), won’t I just have to pay the difference? Or will I be penalized?

I’m a full-time, exempt employee. Thanks.

Hoping to Adopt
Hoping to Adopt
6 years ago
Reply to  imelda

If you owe more than a certain amount, you will have to pay a penalty as well. For a few years, we had to pay in just over $1,000 and had to pay a penalty of a few dollars each time.

Otherwise, if there were no penalty, everyone could set their withholding to zero and just a lump sum in April.

imelda
imelda
6 years ago

Damn. Thanks.

BrentABQ
BrentABQ
6 years ago

Many of these techniques are a “kick the can down the road” style. If you had unusually high income this year you should defer your taxes with these techniques, but if you had unusually low income this year you should probably increase your taxes this year in order to get a lower marginal rate. And as always you should do what you can now to get an eyeball on this years marginal rate.

Matt
Matt
6 years ago

This article is in need of better editing. A few mistakes I noted: Tip 1: There is no discussion of the safe harbor rules. For most people, as long as you have paid 100% of last years tax in withholding, you aren’t subject to penalties. Also, ES payments aren’t applied as being made equally through out the year the way withholding payments are; accordingly, given the choice between making an ES payment and increasing withholding on a spouse’s check, generally increasing withholding is the better idea. Tip 4: The ACA is based on 2014 AGI. So, if your focus is… Read more »

erica
erica
6 years ago

Doesn’t the ACA subsidy tie to the same year AGI, not prior? My understanding is that the insured is responsible for accurately predicting AGI of the year in progress. Would be great if I was wrong tho!

Springfield MO CPA
Springfield MO CPA
6 years ago

For those with savings tied up inside a qualified retirement plan, unloading losing investments won’t do them any good from a tax planning standpoint.

Also, using savings to fund a ROTH, traditional IRA, or increase 401(k) contributions would be much better options than increasing deductions as those deductions (like charitable giving) are gone once paid for up front.

Rich
Rich
6 years ago

But isn’t the ACA subsidy based on 2014’s AGI, not 2013’s? Thus if you were to defer payments until January 2014, you would *increase* your 2014 AGI and possibly negatively affect your subsidy. I’m no accountant so could be mistaken. Anyone?

Elissa @ 20s Finances
Elissa @ 20s Finances
6 years ago

Great tips! I’m always moving around, so the tip about updating my contact information is one I need to remember.

Matt
Matt
6 years ago

Great read. I am def thinking about paying my taxes quarterly next year instead of taking a big hit at the end of the year.

Shiv Sharma
Shiv Sharma
6 years ago

Great tips here! I’m very much helpful with the post here…I will be paying my tax quarterly so that there will be no such huge amount to pay at once at the end of the year…..

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