7 Year-End Tax Strategies and Moves

Year End Tax Planning Tips

Making any year-end tax moves?

It’s time once again to start giving some thought to paying taxes. Who’s excited?

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.

Personal Deductions

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.

Business Deductions

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.



Last Edited: December 11, 2012 @ 5:17 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. I think prepaying the January mortgage payment will not affect your interest unless you have already received the bill. If your monthly statement has not yet been generated, this payment will be applied to your principal.

  2. Actually, your January bill is for interest charged in December. So you have been charged that interest and paying it is your right. If you pay it though, I guess it’s possible that the lender may not represent your payment correctly on the Form 1098. But you still paid it, so it’s a deduction.

    Kay Bell from Bankrate and Don’t Mess with Taxes explains it in more detail: http://www.bankrate.com/finance/taxes/cut-taxes-with-early-mortgage-payment-1.aspx

    From my understanding, a lender will not apply a payment to principal unless you tell them to specifically.

  3. Hi PT,
    Lots of good info as usual……..One way I give is to volunteer. Don’t have too much
    cash although I do donate, however, as I operate a small cleaning service, have one
    person +- once a month on disability, and I clean her spot (as my charitable donation)
    - of course there is no tax receipt, but for me that’s not the point. She is so amazing -
    totally deaf and mute speaking with a little teletyper. Makes on think before writing
    what one would like to say……..
    My mom always used to say – “if everyone helped the person on their right and left -
    nobody would be in trouble.
    Hug all the PT’s

  4. Hi PT,

    Do you know if there are limits to how much you can deduct on one’s Schedule C if one makes a certain level of income?

    Thnx, Sam

  5. On the Schedule C (profit or loss from a business), you can deduct expenses that are both “ordinary and necessary”. There is no limit to your expenses. Although if you are expensing $100,000 for a business that is bringing in $1,000 in income, you will quickly get the attention of an IRS auditor. There may, however, be limits on the loss you can use. In other words, if your business loss sends you into the negative on your personal side, then you will probably face a limitation, and a portion of the loss might need to be carried forward to the next year. That’s how I understand it at least.

  6. Cool, thanks PT! Guess I’ll be filling A Schedule C out for blogging this year.

    I’m just glad there’s income limitation i.e. you make more than $50,000 a year in personal/main income, hence you can’t deduct anything on your schedule C etc.

  7. Congrats on creating some blogging income! If anything, your personal expenses (deductions) will help reduce the hit from your business income (once it comes over to page 1 of the 1040). At least that’s how it is for me. We bloggers don’t have many expenses. Good for the business, tough on trying to tame the taxes.

    • I think we do have quite a few expenses.

      Conferences : FinCon, BlogWorld. Blogalicious just to name a few (ticket, lodging, transportation, business cards, gear)

      Dedicated office space in our homes (utilities, phone, laptop-portion thereof)

      Hosting fees

      Miscellaneous fees to keep the blog running smoothly

      There are a few others but yea we have quite a few…

  8. Sharron Clemons says:

    Actually, your January bill is for interest charged in December. So you have been charged that interest and paying it is your right. If you pay it though, I guess it’s possible that the lender may not represent your payment correctly on the Form 1098. But you still paid it, so it’s a deduction. Kay Bell from Bankrate and Don’t Mess with Taxes explains it in more detail: http://www.bankrate.com/finance/taxes/cut-taxes-with-early-mortgage-payment-1.aspx From my understanding, a lender will not apply a payment to principal unless you tell them to specifically.

  9. Marisol Perry says:

    Hi PT, Lots of good info as usual……..One way I give is to volunteer. Don’t have too much cash although I do donate, however, as I operate a small cleaning service, have one person +- once a month on disability, and I clean her spot (as my charitable donation) – of course there is no tax receipt, but for me that’s not the point. She is so amazing – totally deaf and mute speaking with a little teletyper. Makes on think before writing what one would like to say…….. My mom always used to say – “if everyone helped the person on their right and left – nobody would be in trouble. Hug all the PT’s

  10. Chris Denton says:

    I didn’t notice anywhere, but I highly suggest making contributions to your 401k, or Keogh account as well. Those are some of the best deductions out there.

  11. Good point, Chris. The 401(k) is something I have maxed out in the past. I contributed this year before becoming self-employed. So I’m able to deduct that. But from my understanding I can’t do anymore tax-deductible contributing in another account this year. We can put money in our Roth IRAs though. Next year, since I’ll still be self-employed, I will go for a SEP IRA to contribute even more.

  12. There are three basic year-end tax planning techniques that can be utilized to successfully manage income taxes: deferring income to the following year, accelerating deductions into the current year, and taking advantage of any expiring tax provisions.

  13. There are three basic year-end tax planning techniques that can be utilized to successfully manage income taxes: deferring income to the following year, accelerating deductions into the current year, and taking advantage of any expiring tax provisions.

  14. There are three basic year-end tax planning techniques that can be utilized to successfully manage income taxes: deferring income to the following year, accelerating deductions into the current year, and taking advantage of any expiring tax provisions.

  15. These are great tips! I think I ‘ll implement the one about prepaying my mortgage now.