Have you ever wonder how you can optimize your taxes? Or if you could do anything to increase your tax refund before year-end? Here you will find the 11 best year-end tax tips you can use to grow your next tax refund.
The IRS is like your business partner because you cannot escape it. Whenever your business is making money, both you and the IRS will benefit from it. You have a contract with the IRS, and it is called the tax code.
Those tax rules are essential because they let you know how you can optimize your taxes to get a bigger tax refund. However, you have to think about that before filing your taxes. That is why year-end is a great time to assess your situation and optimize your taxes if you didn’t have time to do it yet.
1 – How To Choose Your Tax Deduction Category?
Standard vs. Itemized
You can take advantage of the standard tax deduction without having to do anything special. In 2019, this tax deduction was $12,200 for a single person and $24,400 for a married couple.
The itemized tax deduction is a little bit more complicated. You have to keep track of many documents and also do some calculations. The most popular itemized deductions are state and local taxes, home mortgage interests, and charitable contributions. Just keep in mind that the state and local taxes have a cap of $10,000 per year.
What Is The Best Option For Your Financial Situation?
Calculate your itemized deductions to make the right decision. If the sum is greater than the standard deduction, the itemized deduction is the best option. If not, the standard deduction is the best option.
For example, let’s say you are single, you rent an apartment, and you don’t make considerable charitable contributions. In this case, you will most likely choose the standard deduction unless you max out the state and local taxes, and you have more than $2,200 in extra deductions.
If, after doing the maths, you find out that both deductions give similar results, why not making a charitable contribution. You might not get a big tax cut from it, but at least you will give back to your community and help people in need.
2 – What Is Tax Loss Harvesting?
You can take advantage of the tax-loss harvesting strategy if some of your investments are losing value. In other words, this strategy allows you to offset your capital gains by selling your losing investments.
For example, if you sell some investments for a $5,000 gain and sell other investments for a $4,000 loss, your capital gains will only be $1,000. So, instead of paying taxes on $5,000, you will pay taxes on only the $1,000. However, you have to sell your losses before the end of the year to take advantage of this strategy.
In case your losses exceed your gains, you can deduct up to $3,000 from your income. However, if it exceeds $3,000, the remaining losses will be passed to the next tax year.
3 – How To Maximize Your Retirement?
Another powerful year-end tax tip is to maximize your retirement contributions in a 401(k) or IRA. It can help you save money for your future and also reduce your taxable income immediately. In 2019, the contribution limit for 401(k) plans was $19,000, and $6,000 for IRAs. So if you haven’t reached the limit yet, increase your next contributions for the rest of the year.
4 – What To Do With Your FSA?
If you contributed to your FSA (Flexible Spending Account) all year long, now it is a great time to assess what you can do. FSAs allow you to carry over up to $500 to the following year. So, if your remaining balance is higher than $500, it is time to catch up on your medical visits. Because if you don’t, you will lose this money.
For example, you could make a doctor’s appointment, get physical therapy sessions, or call your dentist and optometrist until your account shows a below or a $500 balance.
5 – How Much Are Your Retirement Account Minimum Distributions?
Take a moment to log into your retirement account to find out how much your yearly required minimum distributions are. It is your last chance to avoid paying a 50% penalty, so it is time to transfer the money to your bank account. This penalty applies to anyone that has more than 70.5 of age or that inherited a retirement account.
6 – How To Protect Your Assets?
It is essential to have a plan for different life scenarios, even if we know how hard it is to think about them. However, it will allow you and your family to avoid making financial mistakes.
First, make sure your beneficiary designations to be up to date on all your financial accounts. If they are not and something would happen, the court will follow your state laws to determine the allocation of your financial assets
Another thing you can do it to have a financial plan in case something happens to any of your family members. Talk to your attorney to know about all the possibilities available in your state.
7 – What Is The IRS PIN?
Identity theft is common during tax season, and it is the last thing you want to have in mind when filing your taxes. The most common tax fraud is for someone to file your taxes on your behalf and collect your tax refund.
However, the IRS put a system in place to protect you against identity theft. In January, you can go to the IRS website and apply for a PIN (Personal Identification Number). Each year, the IRS will send you a unique PIN. You will have to file your taxes using this PIN because that is the only way they will accept your tax return forms. As of 2019, this service is only available in 19 states.
For example, if someone would file the tax return forms on your behalf without including the PIN, the IRS will automatically reject it.
8 – How To Determine Your Tax Payments?
This year-end tax tip is significant because it can help you avoid the underpayment of estimated tax penalty. This penalty will apply to your situation if you have been paying less taxes than what you owe to the IRS. The good news is that you can determine if you have been paying sufficient taxes throughout the year by using the IRS Withholding Estimator.
If you haven’t paid enough taxes, you can adjust the amount of taxes that the IRS is withholding from your year-end paycheck via your W-4.
9 – When To File Your Taxes?
In 2019, the tax season opened on January 28th and closed on April 15th. However, if you are expecting to get a tax refund, you might want to file your taxes as soon as possible. Think about your tax refund as a free loan that you are giving to the government. So, the sooner you can get it, the sooner you can pay down your debt, increase your savings, or invest it to make more out of it.
10 – What Is Deadline For Your Tax Contributions?
As a rule of thumb, December 31st is the deadline for all your contributions. If you miss this deadline, you will have to wait another year to benefit from their tax advantages. However, there is an exception for HSAs and retirement accounts such as Roth or Traditional IRAs. You can make non-payroll contributions until April 15th or before you file your taxes.
11 – How To Accelerate Your Business Payments?
If you own a business as a sole proprietorship, you might want to accelerate your business payments if you had a significant year in terms of revenue. This strategy consists of paying your next year’s expenses before December 31st. In this case, you can take advantage of the tax deductions immediately instead of waiting another 12 months.
For example, if you earned a well-deserved bonus this year but don’t expect one next year, you might want to accelerate your business payments to reduce what you are going to pay in taxes. So, pay for your rent or buy those big purchases before December 31st to take advantage of those tax deductions.
In conclusion, we hope that you are going to take advantage of these 11-year end tax tips to make more out of your money. No matter what your financial situation is, it is always great to learn more about what you can do to optimize your taxes.