As the holidays and the end of the year approaches, it’s a good time to review your financial plans and ensure you’re doing all you can to both maximize your savings and reduce your tax bill. Don’t wait until December to assess your finances—you could miss out on opportunities that disappear at year end.
Here are five things to consider doing right now:
1) Maximize your retirement savings: Contributions to tax-deferred retirement accounts—such as a 401(k)—reduce your taxable income and provide tax-free growth until retirement. Now is a good time to evaluate your overall savings and determine if you can bump up what you’re putting away for retirement. You can also make lump-sum contributions from an annual bonus to give your savings a boost. And if your employer offers matching contributions—don’t leave free money on the table—it’s a good idea to take full advantage of those additional funds.
If you’re currently in a lower tax bracket and you’re likely to be in a higher tax bracket when you retire (a lot of younger people fall into this category), consider making contributions to a Roth IRA or Roth 401(k). Though contributions to Roth accounts are made with after-tax dollars, that money grows tax free and when you retire, you won’t have to pay taxes on ANY of the withdrawals.
Those who are self-employed should consider making contributions to a tax-deferred retirement account such as a SEP-IRA, SIMPLE IRA or Solo 401(k). These contributions will lower your taxable income and could help you stay under the phase-out limitations for the new 20% deduction on pass-through income. Each type of retirement plan has different income limitations, so you need to know what your taxable income will be for the year before you decide which type of retirement plan to contribute to.
2) Consider a Health Savings Account (HSA): It’s open-enrollment season, and if your employer offers an HSA—and you qualify to contribute to one—this can be a tax-smart way of setting aside money for qualified medical expenses. HSAs offer a triple tax advantage: You pay no federal taxes on your contributions, no federal taxes on investment earnings and no taxes on withdrawals as long as the money is used for qualified medical expenses.
If you’re fortunate enough not to have to many medical expenses and have money left over in your HSA during retirement, you can use that money to pay for living expenses—the only caveat being, you’ll have to pay taxes on the withdrawals when they’re not just for medical expenses.
3) Give to a favorite charity: The end of the year is a time when many people think about charitable giving. As with other aspects of your finances, it’s important for charitable giving to be part of a broader financial plan.
One way to maximize the tax benefits of charitable giving is to concentrate your giving into a high-tax year. By giving a large amount one year and not the next, you could maximize your itemized deductions in that year and take the new increased standard deduction next year. Giving appreciated assets in this manner is a great way to maximize your charitable giving deduction, and a donor-advised fund (DAF) could be used to facilitate that gift.
If you’re 70½ or older, you could also consider donating directly to a charity from your retirement account, using a qualified charitable distribution (QCD). A QCD allows you to meet the required minimum distribution and has the added benefit of not being included in your taxable income.
4) Gift assets to your loved ones: Each year you’re allowed to give up to $15,000 to any number of people without them having to pay a gift tax. Taking advantage of this yearly exclusion can allow you to transfer a large amount of wealth to your loved ones tax free and without eating into your gift and estate tax exemption. Those gifts can be used for any number of financial goals, including funding a grandchild’s 529 college savings plan or helping a loved one make a down payment on a new house.
5) Consider tax-loss harvesting: Tax-loss harvesting is an underappreciated investing strategy that you should consider. Investors have a tendency to avoid selling anything at a loss, but there can be a significant tax benefit to selling a losing position if you have capital gains to offset. Tax-loss harvesting can also serve as a motivation to sell under-performing investments or to re-diversify overly concentrated stock positions.
If you need help with any of these tax savings strategies, please call! I love helping my clients save as much money as possible!
Hi! I'm Jaimie and I have a B.A. in Accounting, an MBA with an emphasis in Accounting and a CPA license. I worked for about 10 years in CPA firms doing audits and reviews and then for about 10 years in private companies managing accounting departments. I've learned a lot about accounting, finances and taxes over the last 20 years! And now I want to share my knowledge with you here!