Six Tax Moves to Make Before December 31

Many of us don’t spend a thought on tax planning until W-2s start rolling in and the annual April 15 filing deadline looms on the horizon. Because these yearly reminders of our finances don’t start to demand our attention until late winter, it’s easy to forget that the tax year in the United States begins on January 1 and runs until December 31.

There are several tax opportunities that are only available until the end of the calendar year, so don’t wait until after the holidays to review your tax planning. It’s wise to invest time in these decisions before the end of the year to avoid paying more than necessary, reduce your tax liability, and set yourself up for success in the coming year.

Here are a few of the action items to take advantage of before the end of the year:

1. Review Your Income Before the End of the Year

Although your employer probably guaranteed you a fixed salary for this year, it’s rarely the same number as your gross income by year-end. Now’s the time to review your income to guarantee you can report it accurately when you file your taxes.

When reviewing your annual income, be sure to consider these questions:

- Have you received any raises in the past year? Any bonuses?
- Have your investments generated any passive income this year?
- Have you taken a pay cut?
- Have you received tips in addition to your regular annual or hourly rate?
- Have you received any income from secondary or tertiary sources, such as freelance work?

Preparing informed answers to these questions will ensure you have the most accurate picture of your annual earnings and empower you to make informed decisions about how to handle your income in the coming year.

2. Check Your Retirement Contributions

The end of the year is the perfect time to review your contributions to your retirement accounts—whether you have a 401(k), traditional IRA, or other retirement account—to verify you’re making the most of these accounts before year-end.

In most cases, deferring a portion of your salary to a retirement account is a great way to reduce your taxable income and thus ensure you don’t pay more than necessary in April. Likewise, if you plan to max out your 401(k) or 403(b) for this year, it’s imperative you do so before December 31. Be sure to look into the specific requirements for your retirement accounts to take advantage of the remaining opportunities before the year ends.

3. Review Your Charitable Giving

Charitable contributions can be a win-win—you get to support a cause or community that’s important to you and reap tax benefits in return. However, if you want to benefit from tax deductions in the spring, you must make your donations before December 31 so they will qualify for the current year. The fall is a great time to review the charitable donations you’ve already made and consider other causes you would like to support before the end of the year.

4. Look at Capital Gains and Losses

If you’ve sold any assets since January 1, including stocks, bonds, and real estate, you have a capital gain if you sold your asset for more than you originally paid, or a capital loss if you sold it for less.

If you have a capital gain, now’s a great time to research the taxes you’ll owe so you don’t run into any surprises come April. The tax rate for capital gains varies depending on whether your profits are long- or short-term as well as several other factors. If you’re unsure of which category your capital gain falls into, a tax professional can help.

If you have a capital loss from the past year, you may be able to deduct it in your upcoming tax return, but there are limitations. Be sure you understand how to report your capital gains and losses on your tax return next spring.

5. Review Major Life Changes

It’s no secret that major changes in your life may also cause major changes in your finances. In fact, your tax planning may need to be rethought completely. But what counts as a major life change? Here are a few examples:

- Have you gotten married in the past year?
- Have you gotten divorced?
- Have you had a child or otherwise taken on new dependents?
- Have you bought real estate?
- Have you received an inheritance?

If you’ve experienced any of these events in the last year, your tax planning will likely be very different than it has been in the past. Fortunately, tax professionals are available to help you plan accordingly to guarantee no box goes unchecked.

6. Check Withholding and Estimated Payments

Most employees fill out a W-4 form when they start a new job, which provides information on their financial situation so the government can adjust their withholding accordingly. It’s important to verify your current withholding is still accurate to your financial reality to avoid[Ms1].

If you’ve gotten married, had a child, started a new job, or experienced another major life change in the past year, it’s often necessary to submit a new W-4 form to your employer to adjust your withholding to reflect your new situation. Failure to do so may result in unexpected tax bills in April, so ensuring your withholding is correct now will help you avoid making payments later.

Should You Talk to a Tax Professional Before the End of the Year?

The number of time-sensitive tax planning decisions may seem overwhelming, but a professional tax advisor or financial planner can help you make the most prudent and profitable decisions for your unique situation.

Don’t wait until it’s too late to take advantage of an opportunity that expires after December 31. For personalized help, contact Kembel Tax Service to discuss your year-end tax planning and certify your financial security in the coming year.

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