Year-End Tax Planning

Taxes Blog - JLFranklin Wealth Planning

It’s time once again to take stock of your overall situation and implement a few tax saving strategies before the end of the year. Our goal is to help you lower your taxes and get a head start on your next year’s planning by providing reminders and tips. If your situation warrants preparing a year-end tax projection, you may save significant tax dollars on April 15.

Tax Planning Strategies
Tax planning involves paying attention to two years at once: this year and next year. You can reduce the total tax you pay over both years by strategizing the acceleration or deferral of income and deductions. If you have a choice, it’s generally best to push income into next year, and take deductions this year. Three itemized deductions offer the most flexibility:

  • Mortgage Interest – Make your January mortgage payment in December and take an extra month’s interest deduction this year.
  • Donations to Charity – Deduct payments in the year you mail your check or charge your credit card. Charities like to take your old clothes and household items, but don’t forget to pick up a receipt.
  • Donations of Appreciated Securities – Stocks and mutual funds make excellent gifts to charity. You can deduct the full value of the asset (if you’ve held it longer than one year) and completely avoid any income tax on the appreciation. If you sold the stock instead of donating it, you’d pay capital gains tax on the appreciation.

Tax Payments and Withholding
If there’s been a change to your employment status or a windfall this year, your withholding may be too low, and you may be subject to tax penalties. Consider a tax projection if you’ve experienced any of the following situations:

  • You’ve sold restricted stock, stock option shares, or employee stock purchase plan shares
  • You’ve exercised stock options
  • You’ve changed jobs
  • You’ve received severance pay
  • You’ve received a bonus
  • You have unrealized losses in your taxable investment portfolio
  • You’ve earned income from a consulting engagement

If you are making quarterly estimated tax payments, your fourth quarter payment is due on January 15. However, by paying your state tax early–by December 31 of this year–you may be able to reduce your federal taxes, as long as you are not paying the Alternative Minimum Tax (AMT). Conversely, if you have been making estimated tax payments but have earned less income this year than you anticipated, you may not be required to make the fourth quarter payment.

Selling Stock to Lock in Losses
Taking or “harvesting” losses now is a sure way to offset gains realized earlier this year, or to stockpile losses for future years. It does not matter if the asset sold has been held for less than one year. Capital losses in excess of capital gains can reduce other income by $3,000; any excess loss is carried forward for use in a future year. Remember that if you sell stock at a loss, the wash sale rules bar deducting a loss on a security when a virtually identical one is purchased within 30 days of the sale.

Charitable Giving Strategies
If you are charitably inclined, you may benefit from making a contribution to a donor-advised charitable fund before the end of the year. You’ll get an up-front deduction when you make the donation, but you have years to make the actual contributions to your favorite charities from the fund. Appreciated securities work well with this and other charitable vehicles, as you can avoid capital gains, get a deduction for the full fair market value of the property, and in some cases, still retain control over the money you’ve given away. Some charitable planning strategies require several weeks to implement as asset transfers are involved, so make sure that you start planning early if this strategy interests you.

College Savings Plans
Section 529 College Savings Plans are an attractive way to save for a child’s education. Withdrawals for qualified education expenses are fully tax-free, making the 529 Plan superior in many cases to a custodial account for minor children, especially if the child’s education expenses are more than five years away. Read our Planning with Section 529 College Savings Plan tip for more details about college saving plans.

Retirement Plans
If you participate in deferred compensation plans or have IRAs or other retirement plans, plan to maximize your contributions. Doing so serves to lower your taxable income, allowing your investment to grow tax-free until withdrawal. If you have the option of contributing to your employer’s plan, choose the maximum contribution-or contribute as much as you can afford. If you are self-employed, consider setting up a profit sharing plan or SEP-IRA plan. Profit sharing plans must be established by the end of the calendar year, even though contributions are allowed until the due date of your tax return. SEP-IRAs can be opened and funded up until the due date of your return.

Roth IRA Conversion

You may want to covert your IRA to a Roth IRA to take advantage of future tax-free growth in the account. Of course, income from the conversion will be taxed in the conversion year. See our Roth IRA tip for more information.

Deductions for the Self-Employed
If you have your own business, you have many ways to reduce your income taxes. Here are a few items that may provide tax deductions:

  • Self-employed health insurance premiums
  • Home office expenses
  • Business use of your car
  • Purchased assets, such as supplies, computers, furniture, heavy cars
  • Expenses incurred for producing income, even if you have not yet received income

If you are in the Alternative Minimum Tax (AMT), some deductions will have the opposite effect and not decrease your tax liability. For example, state taxes and property taxes are adjustments for AMT. A tax projection will analyze your situation and recommend an appropriate plan.