Year-End Financial Planning Tips to Save Tax

One of the most distinguished traits of a human being is the ability to plan. Planning helps you to have clarity in your life. It gives you direction and provides meaning to your thoughts. Whether it is a holiday, buying a new car, or preparing for retirement, proper planning can help you reach your long-term goals and short-term targets in a timely and organized manner.  

When it comes to year-end financial tax planning, you need to be concrete and accurate, as there are several variables that can impact your assets. While you might work hard round the year, you can lose a substantial part of your earnings through penalties and additional taxes by not strategically planning for your taxes. 

Here are a few tax planning tips to help you save money:

Take advantage of the retirement accounts

When it comes to year-end tax planning, you should ensure that you are taking the maximum advantage of your retirement savings accounts. The simplest way to do the same is to maximize your retirement plan contributions. By investing in the 401(k) and 403(b) accounts, you not only ensure tax savings but also reduce your tax burden. As of 2019, one can contribute a maximum of $19000 in a year in these accounts, and if you are 50 or older, the maximum limit gets stretched to $25000. With the Traditional and Roth IRA, you can add another $6000 to your retirement savings, and if you are 50 or older, the limit is $7000.

Invest in a Flexible Spending Account (FSA)

When planning for your taxes, ensure that you invest a substantial amount in the Flexible Spending Account (FSA). This is a special tax-free account wherein the contributed amount can be used to pay for the services which are not covered by your health insurance. However, when opting for this, ensure that you check with your office regarding the deadline for using the deposited amount. Contributing money to this account but not utilizing it would be just as good as paying taxes.

Utilize the defer tax facility

The mainstay of efficient tax planning is to take full advantage of the deferral. Many may confuse it with tax evasion, but it is more similar to availing a credit facility. In simple words, deferring tax means to fast-track the deductions while deferring the income. This would allow you to reduce the current tax burden and pay it only when you receive the income. You should also know that the maximum tax deduction that you can avail is $10000.

Invest in opportunity zone investments

Qualified opportunity zone investments are location-specific investment avenues that offer ample tax incentives. These were originally set up to encourage investment in specific locations, but over the years they have become an effective tool for tax saving on capital gains. If you have sold or are planning to sell an asset that is expected to generate a sizeable capital gain, then the opportunity zone investments can be a big savior. You can invest the entire sale proceeds in the opportunity zone funds, within 180 days from the date of sale, and remain invested for at least 10 years. Any gain on this investment would be tax-free. However, if you hold the investment for only 5 years, you may get deferred tax exception of only up to 10% (15% for 7 years). With more than 8,000 opportunity zone funds available in the US, you can defer the tax on your capital gains till the year 2026.

Utilize ’above-the-line’ deductions

For taxpayers who do not itemize deductions, above-the-line deductions are an effective tool to reduce tax burden. It helps you reduce your adjusted gross income (AGI), which in turn allows you to avail of different tax benefits. Some of the frequently availed above-the-line deductions are traditional Individual Retirement Account (IRA) and Health Savings Account (HSA) contributions, self-employment taxes, specific health insurance costs, and any bank penalties that you may have to bear owing to early account withdrawals. HSA contributions are not only tax-deductible, but certain qualified distributions can also be withdrawn tax-free. Therefore, effectively you can adjust all your medical expenses against your income. As per the 2019 Internal Revenue Service (IRS) rule, an individual can contribute a maximum of $3,500 in a year in their HSA account, but a family can contribute up to $7,000. People over 50 can add another $1,000 to the maximum limit.

Take advantage of investment losses and expenses

If you invest regularly in the market, utilizing investment losses and expenses can help reduce your tax burden. Often utilized by professional financial advisors, tax-loss harvesting has emerged as an effective tax-saving strategy. As per the current tax rules, capital losses to the extent of $3000 per year can be deducted from the ordinary income, while carrying forward to the rest to the next year. The only condition is that one cannot repurchase the loss-making investment or an identical one 30 days before or after the sale.

Consider the gift tax exclusion

As per IRS rules, a taxpayer can gift up to $15,000 to an individual recipient in one year. This provides you with a great opportunity to reduce your tax burden while making a positive change in someone else’s life. You can donate cash, items, or precious assets such as stocks, real estate, or paintings to qualified charitable institutions to take advantage of the tax exception.

Judiciously plan for your estate

More significant the estate you have, the higher the tax burden that you would have to bear. This is why estate planning is essential for reducing your tax burden. You can consider gifting a part of your estate to your near and dear ones to reduce its size and in turn also your tax burden.

To sum it up

Year-end tax planning may sound tiresome to many, but it is as important as any other aspect of financial planning that you do. If you do not plan well for taxes at the end of the year, you may end up losing a substantial part of your savings which in turn can impact your other plans. For an effective and safe year-end tax planning, it is strongly recommended to seek professional help as the entire process can be complicated and confusing.

Do you need assistance in tax planning? Get in touch with financial advisors for effective tax-saving strategies.