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Have you ever wondered what year end tax tips people are using to optimize their tax refund? Great! That is exactly what you are going to learn in this article.
That way you can take better financial and tax decisions for your situation and make more out of your money.
All these tips are legal and approved by the IRS. So you won’t have any issues after implementing them.
What Is A Year End Tax Tip?
First thing first, a year end tax tip is an action that you take to make more out of your money.
There are three ways an end of year tax tip can help you.
- Reducing your taxable income
- Using money that would otherwise be lost
- Avoiding penalty fees
Keep in mind that most end of year tax tips need to be executed before December 31st.
11 Year End Tax Tips To Optimize Your Taxes
1 – Determine 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.
Best End Of Year Tax Option
There is no clear winner here because both these end of year tax options will optimize your tax refund. Depending on your financial situation one might be better than the other.
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 – Year End Tax Loss Harvesting Strategy
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 – Maximize Your Retirement Contributions
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 – Use Your FSA
If you contributed to your FSA (Flexible Spending Account) all year long, now 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 – 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 – End Of Year Tax Assets Protection
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 is 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 – Year End Tax Protection With 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.
If someone would file the tax return forms on your behalf without including the PIN, the IRS will automatically reject it.
8 – Determine Your Tax Payments
This year end tax tip is significant because it can help you avoid the underpayment of the estimated tax penalty.
This penalty will apply to your situation if you have been paying fewer 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 – Know 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 – 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 – 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.
Are Year End Tax Tips Legit?
Sometimes most people think about tax optimizations as something that can be shady or is borderline legal.
Rest assured that all the tips that I am going to share with you are all legal and accepted by the IRS. So you won’t have any issues implementing them.
Think about the IRS as your business partner that you can’t escape from. Every time you make money, the IRS will get a percentage of that money.
However, there are rules that both you and the IRS have to follow, it is called the tax code.
Those tax rules are crucial because they are the ones who let you know how to optimize your taxes. And the more you optimize your taxes, the bigger your tax refund will be.
That is why year-end is a great time to assess your tax and financial situation.
In conclusion, these end of year tax tips will help you make the most 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.