Simple Year End Tax Planning Strategies You Can Do On Your Own

Posted December 27th, 2011 in Taxes by Jeremy Waller

With just a few short days until the end of the year, the deadline is quickly approaching to complete your tax planning.

I would venture a guess that most people don’t put much though into tax preparation. They just wait until all of their W-2s, 1099s, brokerage statements and other paper work to come in the mail. Then they sit down to do their taxes sometime before April 15th.

That strategy (or lack of one) could cause you to pay more than you need to. If done right, proper tax planning could save you thousands on you tax bill.

It doesn’t have to be complicated either.

Tax planning can be broken down into two parts – increasing your Adjusted Gross Income (AGI) or reducing your AGI.

It may sound strange that you would want to increase your AGI since that would cause you to pay more, right?

It’s true that it would cause you to pay more this year. However, if you expect your income to be higher next year – you may be able to recognize some of that income this year – paying a lower tax bill overall.

Defer Income and Accelerate Deductions

If your income is higher than normal this year you can either defer income or accelerate deductions. This will cause your tax bill next year to be lower, but will cause the year after that to be higher.

Defer Income

There are a number of ways to defer income to the following year.

  • If you know that your employer will be paying a bonus, see if they will pay it out in the first pay period of January. With larger employers, this probably isn’t possible. However, if you work for a small company they may be flexible.
  • If you plan on making some changes to your portfolio that would subject you to capital gains, consider delaying those until January. If you have enough losers to exceed the $3,000 limit ($1,500 if single), consider selling some of your winners so you don’t lose the benefit.
  • If you are taking distributions from a retirement account, delay a portion of those until after the end of the year.

Accelerate Deductions

You can also reduce your income tax this year by accelerating deductions.

  • Make your mortgage payment by December 31st. If you wait until January to pay it, you can’t deduct the interest on that payment until the following year.
  • If you are planning any charitable contributions in January, make then in December instead.
  • Have outstanding medical bills? Would paying them put your total medical expenses in the current year in excess of 7.5% of your AGI? Then pay them this year and get the deduction.
  • With the way the market has performed this year, you no doubt have some losers in your portfolio. Sell them by year end and offset the capital gains on other positions you may have.
  • If you haven’t fully funded your 401(k) or IRA a contribution before year end will give you a break on your taxes.

Accelerate Income and Defer Deductions

If your income this year is lower than you expect it to be next year you can either accelerate income or defer deductions.

If you’re paying attention, you’ll notice that most of these are simply the opposite of what is above. Nothing fancy going on here.

Accelerate Income

  • If you can, take any bonuses, commissions, etc. before the end of the year.
  • Take capital gains now. Defer losses until next year.
  • Take distributions from retirement accounts before year end.

Defer Deductions

  • Don’t pay your mortgage early. (But don’t pay it late!) Most mortgages aren’t due until January 1st anyways.
  • Delay medical bills and donations until January. The exception to this is if your medical bills exceed 7.5% of your AGI this year, but you don’t expect to meet the limit next year. Take the deduction this year so you don’t lose it all together.

I think a lot of people don’t do any tax planning because they think that its only something that wealthy people have to think about or they think its too complicated.

These tax planning strategies are very simple and can make a significant impact on your tax bill.

Do you do any tax planning? Do you have any tips to save money on income taxes?

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6 Responses so far.

  1. Charles says:

    The only thing i’m worried or dreading is inputting my stock purchases. I sort of went crazy with my picks and made over 1000 transactions! Yikes!

  2. Consider donating your household goods and contribute to HSA. I’m sure there are many more you can do but these are just two. It is always good to start planning in December to make sure you can maximize your tax benefit for April 15.

    • Jeremy says:

      For sure. There’s a long list of things you can do. The ones I mentioned in the post and the two you mentioned are some of the simplest that a lot of people don’t think about.

  3. You beat me this time. This is getting a little weird, but I have a similar post going up at Financial Success for Young Adults (where I staff write).

    It’s a good thing the blogisphere is big enough for the both of us. As always, you did a great job with the content!

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