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Tax Tips
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7 Year-End Tax Tips
Whether you are having a good year, rebounding, or struggling, you may be able to save on your upcoming taxes if you make the right moves before the end of the year. Here are the 7 most common year-end tax for individuals and businesses. Scroll down below for business year-end tax tips.
1. Defer Income
Income is taxed in the year it is received. To avoid paying taxes in the near term on certain income -bonuses, self-employment billings, or capital gains – defer taking them until after the end of the year.
It’s tough for employees to postpone wages and salary income, but you may be able to defer a year-end bonus into the next year.
If you’re self-employed, do freelance work or have a side-hustle, you may have more leeway. Delaying billings until late December, for example, can ensure that you won’t receive payment until the next year.
"Common tax tips for Individual and Businesses to make before Year-End"
2. Contribute the Maximum to Retirement Accounts
401(K) - Company sponsored 401(K) plans may be the best deal because the employer often matches contributions.
Try to increase your 401(K) contributions so that you are putting the maximum allowed ($22,500 for 2023, $30,000 if you are at age 50 or over)
IRA – Consider contributing to an IRA
You usually have until April 15th, 2024 filing deadline to make IRA contributions, but the sooner contribute your money into the account, the soon it is potential to start growing tax-deferred.
Making deductible contributions also reduces your taxable income for the year.
You can contribute a maximum of $6,500 to an IRA for 2023, plus an extra $1,000 if you are 50 or older.
3. Sell loser investments to offset gains
A key year-end strategy is called “Loss Harvesting” – selling an investment such as stocks and mutual funds to realize losses. You can use those losses to offset any taxable gains you have realized during the year.
Losses offset gains dollar for dollar. And if you losses are more than your gains, you can use up to ($3,000) of excess loss to wipe out other income.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any gains in that year or wipe out any other income. Currently you can carry over losses year after year for as long as you live.
4. Watch your Flexible Spending Accounts
Flexible spending accounts (FSA), also called “Flex Plans”, are fringe benefits which many companies offer that let you steer part of your income in a special account which then can be tapped to pay childcare or medical bills. FSA allow you to contribute up to $3,050 in pre-tax money to pay for out-of-pocket expenses for 2023
The advantage is that your money goes into the account and avoids both income and Social Security taxes. The downside is “Use it or Lose it” if you don’t use it all by the end of the year, you forfeit the excess.
With year-end approaching, check to see if your employer has adopted a grace period permitted by the IRS, allowing you to spend 2023 set aside money as late as March 15th, 2024. If not, do what most people do and make a last-minute trip to the drugstore, dentists or optometrist to use up the funds in your account.
5. Avoid the “Kiddie Tax”
Congress created the “kiddie tax” rules to prevent families from shifting the tax bill on investment income from Mom and Dad’s high tax bracket to junior’s low tax bracket.
For 2023, the kiddie tax taxes a child’s investment income about $2,500 at the same rates as the parents. If your child is a full-time student who provides less than half of his or her support, the tax usually applies until the year the child turns age 24.
So be careful if you plan to give a child stock to pay for college expenses. If the gain is too large and the child’s unearned income exceeds $2,500, you could end up paying taxes at the same rate as you do.
6. Check IRA distributions
You typically have to start making regular minimum distributions from your traditional IRA by April 1 of the following year in which you reach age 73 (70 ½ if you reached 70 ½ prior to January 1, 2020) Failing to take out enough triggers one of the most worst IRS penalties.
A 50% excise tax on the amount you should have withdrawn based on your age, life expectancy, and the amount in your account.
When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments.
*Important note: One of the advantages of the Roth IRA is that the original owner is never required to withdraw money from the accounts. The required minimum distributions apply to traditional IRAs.
7. Beware of the Alternative Minimum Tax (AMT)
Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class.
The AMT is figured separately from your regular tax liability and with different rules. You have to pay whichever tax bill is higher.
This year is a year-end issue because certain expenses that are deductible under the regular rules are not deductible under the AMT tax rules.
State and Local income taxes and property taxes, for example, are not deductible under the AMT. So expect to be subject to the AMT in 2023, so you may not want to pay installments that are due in January 2024 in December 2023.
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Tax Tips for Businesses
If you own a business, you can take a tax deduction for a wide range of business-related costs. If you’re keen on reducing this year’s income taxes, bunch or “bundle”, your expenses as much as possible by the end of the year. Here are some common year-end tax strategies.
Pre-Pay expenses – Make any anticipated major business-related purchases at the end of the year instead of the beginning.
For example, if you regularly spend $2,000 per month on supplies, consider buying $6,000 in supplies to get you through the next 3 months. By making a bulk purchase at year-end, you’ll get a tax deduction in the current year for that expense.
Bonuses - Pay your employee bonuses at year-end, rather than at the beginning of the year.
Large Equipment - Purchase that large truck or equipment by year-end to get special depreciation and tax deductions for that asset.
Pushing Revenue (Sales) into next year - Delay your billings until late December that way you most likely won’t receive your payment until next year.
Retirement Contributions – Consider a “Keogh Plan” this is a tax deferred pension plan available to self-employed individuals or un-incorporated business for retirement purposes. These plans must be established by December 31st but contributions may still be made until the tax filing deadline (including extensions) for your 2023 return. The amount you contribute depends on the type of plan you choose.
Converting to a Small Business Corporation (S-Corp) – If you’re a sole-proprietor or an LLC you may benefit tremendously by getting your business incorporated. There are so many benefits of being incorporated. One of them, for example, is having your business pay you as an employee. The tax structure of an S-Corp is monumental in tax savings.
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Accountants and Tax Preparation in Bothell - Mill Creek, WA. Serving the greater Seattle area of King and Snohomish county.
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