It isn’t too late to lighten this year’s tax burden. Here’s how.
Sure, it is the end of the year, and it might seem that it’s too late to do much to affect how much you pay in taxes this year. Fortunately, that’s not the case. Even during the last months of a calendar year, there is still time to make money moves that can help you pay less. We’re talking about simple things that are easy to do and make a significant impact when you file returns next year. Here are the details.
Add more funds to your retirement
Take stock of your income and consider making an additional contribution to your retirement fund. If the contribution doesn’t put you over your contribution limits and your budget can afford the hit to your paycheck, there’s every reason to go for it.
As you’ll find out, this action is one of the smartest money moves you can make. That’s because it adds heft to your next egg and gets you closer to the day when you can stop working for good. Also, while the straightforward contributions too are great on their own, growing them helps build the momentum of compound interest. The entire bulk of your savings, both past and present, grows faster with each additional amount you add.
Document losses in investments
There’s an upside to the sad fact that not all investments turn out like you hoped they would. As it turns out, losing investments can reduce your tax burden.
The end of the year is an excellent time to review your stocks, real estate, and other investments, scouring them for losses and documenting what you find. They can offset any gains you’ve made in wise investments, and they can help mitigate the tax burden you have from a steady income or business profits earned through the year.
Make business and home office purchases
That’s right, end of the year shopping can help your tax bill. If you’re purchasing for your small business, including buying home office supplies, these will offset your income, lowering the amount of your deductible earnings. Keep in mind that it pays to track your shopping closely. Depending on where your income sits and how much shopping you do, the spending can potentially save you more because it drops you into a lower tax bracket.
Make charitable donations
While it is a pleasure to support charities during any time, end of year giving can simultanously help a deserving organization and reduce your tax burden.
During the fourth quarter of each year, one of the items that most filers pay attention to is their charitable donation. While it is a pleasure to support charities during any time, end of year giving can simultaneously help a deserving organization and reduce your tax burden.
If you’re planning to boost your giving, be rigorous about how you track your gifts. Keep receipts and keep a log of your donations so that including them on your return is as easy as possible. You’ll need that documentation for your tax preparer and to answer any questions that come up after you file.
Be aware that some things you do next year can affect this year’s return
Believe it or not, once January 1st hits, there’s still some time to make moves that impact this year’s return. Prime examples are gifts tagged to charitable donations and contributions to your retirement funds. Besides, you may be able to make estimated tax payments that also impact this year’s return.
How can you find out what you can do? After the new year, talk to your accountant or tax professional to see what money moves make the most sense for your situation.
A deeper dive – Related reading from the 101:
- Your guide to quarterly tax payments | Finance 101
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- Want a tax break? Transform your hobby into a business | Finance 101
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