Tax planning during the end of the year can have a surprising impact on the amount you have to pay during the upcoming tax season. If you're looking to minimize your tax burden in the spring, start planning now with these end of year tax tips, brought to you by the tax professionals at Paramount!
You can avoid an unwelcome surprise on your taxes and ensure you get the refund you want next year by checking your withholding amount now. Using the IRS's tax withholding estimator, you can determine whether you've withheld the correct amount from your paycheck. If the amount is incorrect, you can file a new Form W–4 with your employer to increase the amount before the year's end.
Tax–loss harvesting allows you to sell stocks that have lost you money. In a year when your capital losses outweigh your capital gains, the IRS will let you deduct up to $3,000 from your federal taxes. This deduction offsets gains on other stocks and helps you to reduce the capital gains tax you owe. Any remaining losses will offset your income in future years.
Mutual fund shareholders face potential tax consequences at the end of the year, making it a notoriously bad time for mutual fund purchases. If you purchase a mutual fund in the fall or winter, you may pay more in year–end dividends. Even if you just purchased shares, you may pay taxes on a profit you haven't seen. To avoid paying additional taxes, consider holding off on mutual fund purchases until the beginning of next year.
While income is taxed in the year it is received, you may be able to minimize your current income tax liability by postponing your income. For example, traditional employees may be able to defer a year–end bonus to the following year. Freelancers or self–employed workers can delay billings to ensure that the payment won't be received next year. If you are financially able to, this strategy will also allow you to invest the money you would have used for income taxes. When you report the income, you may even find yourself in a lower income tax bracket, thanks to the deferral.
While the idea of meeting with your tax professional may only cross your mind during tax season, meeting with them in the fall can be beneficial. A fall meeting allows you to discuss end–of–tax–year reduction strategies you can use before December 31. Your advisor can look at your finances for the year so far and estimate what your taxes will look like in the spring.
At Paramount, our professionals can help you create an effective tax plan and implement strategies to make the upcoming tax season easier. We'll walk you through your financial information and assist with any other tax needs. Contact us to schedule an appointment today!
