End-of-Year Planning: Tax Savings

If it’s nearing the end of the year, it’s not too late to capitalize on some tax savings opportunities. Start with this list of potential items and work with a Money Coach for additional tips.

Tax Withholding

During the last few months of the year, there’s still time to adjust your federal tax withholding.  If you typically receive a refund or owe money, it may make sense to make changes before the end of the year.  Use the IRS Tax Withholding Estimator.  You will need your pay stubs, information about all income for the year, and your most recent tax return.

Remember that if you change your withholding at the end of the year, you will want to revisit the estimator and assess your withholding again to be sure you are off to a great start in the new year.  For example, if you have already had too much tax withheld and you make adjustments at the end of the year to receive more take-home pay, you might owe money the following year if you don’t readjust and have enough withheld.

Retirement Plan Contributions

Pre-tax retirement contributions can reduce your taxable wages reported on your W-2.  If you can increase your contributions during the last few pay cycles of the year, you may be able to save more for retirement and reduce your tax liability. However, be aware that increasing your pre-tax deductions means that less income tax will be withheld from each paycheck.  Overall, your tax liability will be reduced, but it is critical to evaluate if enough income tax will be withheld after you make any changes to your pre-tax deductions. Many plans also offer a Roth option, which won’t reduce your taxable income now but may offer you the benefit of tax-free income in the future.  Those who are 50 and older by the end of the year may want to consider catch-up contributions.  If you are trying to save as much as you are eligible to contribute, use this calculator from FINRA to “Save the Max.”

Health Savings Accounts (HSAs) & Flexible Spending Arrangements (FSAs)

If you have an HSA, have you contributed the maximum amount for the year?  If not, consider looking for ways you might contribute more before the end of the year.  Even if you don’t need to use the funds in your HSA this year, contributing the maximum allows you to save for future healthcare expenses. If you fail to increase your HSA contributions by the end of the year, you can make a lump sum contribution before the tax filing deadline in April.  Be careful not to overcontribute.  The annual contribution limit includes any funds your employer contributes.

If you have an FSA (also known as a Flexible Spending Account), will you have a balance remaining before the end of the year?  Get details from your employer about deadlines, eligibility for a rollover, or using the FSA funds before it’s too late.

Tax Credits & Deductions

Qualifying for tax credits and deductions can change the amount of tax you pay.  Credits can be applied to the amount of tax that you owe.  Deductions reduce the amount of taxable income and could result in a lower tax liability.  For example, it might make sense for you to make qualified charitable contributions before the end of the year to benefit a charitable organization and lower your taxable income. Reducing your adjusted gross income may qualify you to take advantage of a tax deduction or credit. See IRS Credits and Deductions for more information.

Windfalls or Life Events

Many things can impact your tax liability.  Did you buy or sell a business or a personal or real property this year?  Did you receive a bonus or start a side business?  Get married or divorced?  Have a child?  Many factors can influence your taxes, including receiving an inheritance, stock options, a bonus, or a change in your filing status, among other things.  If you’re unsure how changes may influence your tax situation, get help from a Money Coach tax specialist.

Know the Tax Impact of Selling or Rebalancing Investments

You may incur a gain or a loss if you sell, buy, or rebalance investments in a taxable account.  It might make sense to offset a gain with a loss, but using caution is essential.  Seeking guidance from an investment professional might be prudent if you don’t fully understand the rules for short and long-term gains and losses and taxation.  Consider strategies to minimize your tax liability.  See the IRS Capital Gains and Losses page for more information about the definition of a capital asset, the difference between short-term and long-term gains and losses, and the current Capital Gain Tax Rates.

Keep Up to Date & Protect Yourself from Tax Scams

Learn what you need to know about tax scams/consumer alerts, how to avoid fraudulent activity, and check out timely consumer updates with IRS Tax Tips.

As you wrap up the year and consider your financial situation, take advantage of any tax-saving opportunities and use your employer-provided resources wisely by learning more about how you can improve your finances.  Ask tax questions and work with an MSA Money Coach tax specialist to develop a financial action plan.