Even though it may feel like a chore, it’s wise to do a little analysis at the end of the year to see if there are any year-end tax moves you need to make.
I suggest you get with a CPA or use the free tool from TurboTax, TaxCaster, to help you estimate where you’re at.
Remember, corporate returns are due on March 15, 2013. Personal tax returns are due on Monday, April 15, 2013, the last day to file taxes. But you can file your taxes with the IRS as soon as you have them prepared and as soon as they are ready to start taking returns.
But before the year is through, here are some things you can think about doing to decrease the amount of taxes you’ll pay.
1. Maxing out 401K (or 403B) contributions. This is probably the biggest single move anyone can make at the end of the year to help their tax situation. Take a look at your last paycheck and see how much you’ve contributed. Compare that to the annual maximum allowable contribution. Make an adjustment to your contribution percentage so that you get as close to the max as you can. Unlike the rest of these deductions, it doesn’t matter if you think we’ll have higher tax rates next year or not. You only get one shot at the 2012 maximum. Take advantage.
You should also strive to make maximum contributions to your other retirement (Traditional IRA) and health savings accounts. But the deadline for those isn’t 12/31. It’s April 15, 2013, or your tax filing date. So maybe wait till later to make these contributions. But remember you’ll need to have the HSA open before the end of the year to qualify for 2012 contributions.
The remainder of these personal deductions are going to depend on if you think tax rates will be higher in 2013, and/or if you think some deductions are going to go away (i.e. like a cap on charitable deductions). It’s hard to say what will happen with the fiscal cliff negotiations, so I’d only be guessing by trying to tell you what to do here.
If the federal government does nothing between now and the end of the year, we will go off the “fiscal cliff”. Meaning, tax law will return to what it was prior to 2001. I have no idea what’s going to happen. If I had to guess I’d say there will be more passing the buck. The government will “kick the can down the road” by passing some temporary measure and leave it up to future decision makers to make the tough decisions.
That said, I do not expect taxes to go down on me anytime soon. The voters have shown they want a bigger entitlement state and there will continue to be pressure to increase taxes to keep up. When looking at my personal situation, I’m taking as many deductions as I can this year. My business income isn’t guaranteed and it’s constantly fluctuating. I have no idea if I’ll make more or less next year than I did this year.
Additionally, even if rates stay the same for me, some tax deductions may be capped based on my income. So I would want to take as many deductions as I can this year if they are going away for someone at my income level. It’s hard to know what will happen. So I’m following a “take what I can get” strategy.
2. Giving extra to your church and other charities. We try to be better givers throughout the year, but we often find ourselves playing catch-up at the end. This is not so much the case for 2012, but we have at least one more check to write our Church. More places to give: schools, colleges, foundations, charitable organizations, like Habitat for Humanity. Charitable contributions are deductible if they are made to qualifying organizations. They are reported on the Schedule A.
3. Prepaying January mortgage payment. I did this last year and it worked out nicely. The payment you make in January is actually for December interest, so it’s theoretically sound to deduct the interest from this payment in December, as long as you actually pay it then. By paying it early, my lender should pick up on it and reflect this in my Form 1098, showing the amount of interest I paid for the year. Like property taxes, mortgage interest is deductible on Schedule A.
4. Paying annual property taxes early. These aren’t due until January. But I can pay property taxes now and I’ll be able to deduct them on my 2012 return. Property taxes are big in Texas, where we have no state tax. So this is a nice deduction to add to my itemized list on Schedule A.
I run a couple of small businesses (this blog and FinCon), so I also look for ways that my business income and expense can help me have a happier tax season.
1. Spend next years dollars now. In the past I’ve chosen to reinvest some of my earnings from the year back into the business. Last year I actually already made a couple of these purchases: a new monitor and a wireless keyboard. Both have helped to make my home office a more productive place, and helped to reduce my taxable business income. This year I accelerated one business expense: rent. I prepaid three months rent at my new office. Think about your business expenses over the next couple of months. Is there anything you can purchase now that you absolutely know you’ll need next year? Doing so will increase your expenses and reduce your taxable income.
2. Delay billing for services. I use the cash basis of accounting, so I don’t count income unless I’ve received the payment. For some of my clients if I don’t want to receive payment, I simply don’t invoice them. By delaying income, you reduce your taxable income for the year and will pay fewer taxes.
3. Opening and contributing to an Individual 401K. Just like on the personal side, a tax-advantaged retirement account, like the Individual (or Solo) 401K can really help you rack up the deductions. I opened an Individual 401K for my business last December. I contributed the maximum that I could afford before the end of the year. This reduced my current year tax burden by a significant sum. I plan to do the same for 2012.
What tax planning moves are you making before the year is out? I’d love to hear your approach.