Taxes may be considered inevitable, but the amount owed is not. Various strategies can allow you to owe less or put off some of the bill so that it doesn’t come due until the next year. These methods cause direct savings since they lower the amount of money that has to be spent. Here are a few of the top strategies:
How to Save at the End of the Year
Many companies pay out bonuses at the end of the year. If possible, make arrangements so you get these payments after January 1. This will put them into the next tax year, so the full amount can be enjoyed until that year’s taxes are due.
Those who are self-employed can sometimes use this strategy as well. If customers pay on an invoice basis, make the year-end invoice due sometime in January. Some of the customers will take the opportunity to pay more slowly, and these payments will go into the next year’s accounting.
Give to Charity before January 1
The end of the year is a great time to clean out the house and give away unused items. Get a receipt for everything to comply with current tax law. Then deduct any allowable donations.
Contribute to a Tax-Deferred Retirement Plan
Certain IRA accounts and other retirement plans allow taxes to be deferred until withdrawal time. Make sure to max out the yearly allowable contribution before the end of the year to get the full benefit of this feature.
Retirees: withdraw the minimum allowable amount from your IRAs. Once investors reach age 70.5, tax law demands that a certain amount be withdrawn from traditional IRAs every year. Make sure to take at least this much out by the end of the year, or else there’ll be a 50 percent excise tax on the amount that should have been withdrawn.
Consider selling off losing investments by the end of the year and deduct the allowable losses. This offsets gains made from other investments. Be warned that the deduction will be disallowed if the same or a substantially similar investment is repurchased as soon as the New Year starts.
Avoid buying into mutual funds at the end of the year. It may seem like a good idea to buy funds right before they pay out their dividends, but the benefit is diminished by the fact that the share price will drop by the paid amount. The IRS will also charge taxes on those dividends. This may make these funds poor choices for year-end investing.
Give Money Away
Those who really hate the idea of paying taxes might prefer to give money to people they know instead. In certain situations, up to $14,000 can be given to each recipient without triggering the gift tax.
Gifts of this nature often go to minor children, but be careful: If a minor makes more than $2,100 of investment income, it will be taxed at the parents’ rate. Since children’s investment income isn’t taxed at all below that amount, it makes sense to be sure that the gifts won’t kick them over that limit.
Make sure tax withholding closely matches the amount due. Tax withholding is standard for employees, but how much is withheld depends on the amount of allowances taken. If the amount is too high, there’ll be a fat refund at the end of the year. Refunds, however, represent money that could have been invested elsewhere if it had been paid out at the time of earning.
Under-withholding is also a problem. If less than 90 percent of tax due was withheld in the typical employee situation, the IRS can charge an underpayment fine. Therefore, it’s a good idea to make sure that enough money is being held back from paychecks.
Pay Deductible Expenses Early
Certain expenses, such as mortgage interest and retirement account payments, are deductible. Pay them before the end of the year to get the deduction on this year’s return. Note that some deductions are disallowed for those who pay under the Alternative Minimum Tax regimen.
Talk about investments often makes those without them wonder how to get started. The first thing these people should concentrate on is how to save money for investing. One good way is to follow these tips for lowering tax expenses. With lower taxes, more money will be available for other things.
Other Ways to Save for Investing
Lowering everyday expenses through the use of coupons, efficient purchasing habits, and choosing lower-cost entertainment options. It’s important to resist the urge to just spend the money saved this way on other things. Instead, squirrel it away so that it adds up. Soon, there will be enough money saved up to get started on proper investing, and it’ll be time to put the investment-related tax tips to use!