With Christmas parties and shopping and family and friends, this isn’t the time of the year that most people are thinking about – or wanting to think about – taxes.
But a little year-end tax planning now will go a long way toward making your Spring and a little springier.
For individual and family tax planning, now is the time to get organized, consider making tax saving investments and maximize your options for deductions. It’s important to remember that traditionally some tax laws affecting the current year are passed at year’s end, so it’s impossible to know in January what laws will be passed in December. That’s one of the many reasons you should keep a thorough filing system throughout the year.
What follows is a list of steps to help individuals and families plan how best to prevent hassles in the coming months.
Take Stock and Get Organized
First you need to calculate your year’s income, including any bonuses or additional income you expect to earn. You should also estimate what you expect to make in the coming year, as that amount might have a bearing on the decisions you make for this year.
You should also make a list of any significant life changing events: marriage or divorce, children, a new job or a new home. These are important for mapping out a strategy to give you the biggest tax savings.
And, of course, individuals and families must be cognizant of the Affordable Care Act. Unless
you fall into one of a few categories of exempted individuals, you must carry minimum essential coverage as defined by the Affordable Care Act or facing paying the shared responsibility payment.
Once you’ve taken stock of the big things that will impact your tax planning – income, life events and health insurance – you need to get organized.
If you do not already have a filing system in place, you need to start one. And if you want to make next year’s holiday season a little jollier, get in the habit now of keeping up with your filing system through the coming year.
You should have files to separate mortgage information, medical information, tax and tag
payments, charitable donations, unreimbursed employee expenses, insurance expenses,
investments and in-home business expenses (if applicable).
If you have rental or other income and expenses, you should have separate files for that
Invest and Save
It’s not too late at the end of the year to take advantage of investing strategies that lead to tax savings. Once you’ve taken stock of where you are, you may need to consider some end of year investing that can provide big savings on taxes.
It doesn’t just make good sense for retirement investing, but if you are able to max out your 401K it makes good sense for tax savings. An individual can contribute up to $18,000 a year to a 401K, and if you are over 50, the amount increases to $24,000.
An IRA is another way to set aside money for retirement and save on taxes. If you can, contribute up to $5,500 (or $6,500 if you’re over 50) to an IRA account.
Investing doesn’t have to be limited to retirement. If you have children who you expect will one day attend college, in Georgia you can open a 529 plan to set aside as much as $2,000 a year for college. You should make sure it is a qualified plan for Georgia. Georgia also allows you to set aside money for private school funding if you have young children and anticipate that they will attend private schools.
Another important strategy to consider is harvesting capital gains and losses. You should speak with your financial advisor to see about offsetting capital gains against loss carry forwards.
Bunch Your Deductions
In some cases, it may make sense to bunch deductions at the end of the year, and there are a variety of strategies for doing this.
If you are paying college expenses, you can pay in the current year for the first three months of the coming year and deduct those expenses in the current year.
You can pay your January 1 mortgage payment prior to the end of the year and get a larger mortgage interest deduction for the current year.
You can make charitable donations at the end of the year. In some cases, these do not have to be monetary donations. You can donate clothes, furniture or other items of value and keep the receipts. The IRS does require written documentation from the 501c (3) organization as well as an itemized list of the items donated. Not only does this help with tax savings, but it also helps clean out the house of unwanted and unused items.
If your medical expenses are getting close to a deductible amount and you have outstanding balances, pay off those balances and earn the medical deduction, currently at 10% of your AGI or 7.5% of your AGI if you are age 65 or older.
Flexible Spending Accounts and Health Savings Accounts are another way to increase your deductions. If you use an FSA, you need to be sure you spend the entire amount before you lose it. FSAs are most often used for medical expenses but can also be used for other types of expenses such as dependent care.
You might also be able to increase your contributions to an HAS HSA at the end of the year. The maximum allowed contribution to an HAS HSA is $3,350 for an individual or $6,650 for a family.
You can even save on your taxes by paying your taxes. If you pay state estimated taxes, pay the January 15th payment in the current year and deduct next year’s tax payments this year.
Though it takes some year-end planning and effort, individuals and families can typically find important tax savings by going through the work of tax planning at the end of the year.
If you think you or your family could benefit from year-end planning, we’d encourage you to give North Georgia Accounting Solutions a call at 678-804-4011 and we can help you get started on a year-end path that will reduce stress and probably save you some money in the coming year.