Year-End Tax Planning Strategies

January 10, 2024 7 mins

If you’re looking to save on taxes, the window of opportunity closes on December 31 — meaning the time to assess your tax situation hits just as summer is winding down so you have time to impact your bottom line for the tax year.

As the end of the year approaches, it’s a good idea to review each suggestion under any categories that apply to you. A tax planner can suggest a number of year-end tax-planning strategies that might help reduce the amount you owe, including some of the following.1

Tax planning strategies for filing status and dependents

  • Filing status: If you’re married (or will be by the end of the year), compare your tax liability for filing your taxes jointly vs. filing them married separately. Choose the option that taxes you less.
  • Dependents: If you and several others are financially supporting someone but none of you qualify to claim the individual as your dependent, consider making an agreement with all the involved parties so that at least one of you can claim the individual as a dependent. Doing so can provide certain tax benefits.
  • Adoption tax credits: Use the adoption tax credit for any of your qualified adoption expenses. In 2023, you may be able to claim up to $15,950 per eligible child, including children with special needs, as a tax credit. This credit begins to phase out once your modified Adjusted Gross Income (AGI) exceeds $239,230 and it’s completely eliminated when your modified AGI reaches $279,230.

Family tax planning strategies

  • Kiddie tax rules: In some cases, you can minimize overall taxes by shifting income to family members who are in lower tax brackets. How this tax planning strategy works: Under kiddie tax rules, the unearned income of a child in excess of $2,500 (in 2023) is taxed at the parents’ tax rates. The kiddie tax rules apply to: (1) those under the age of 18, (2) 18-year-olds whose earned income doesn’t exceed one-half of their support, and (3) those aged 19-23 who are full-time students and whose earned income doesn’t exceed one-half of their support.
  • Annual gift tax exclusion: You can make gifts of up to $17,000 (in 2023) per person federal gift tax-free under the annual gift tax exclusion. Use any assets that are likely to appreciate significantly for optimum tax savings.
  • Higher education tax credits: See if you’re eligible for the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Tax Credit. Since these credits are based on the tax year – not the academic year – you should try to bunch expenses to maximize the education credits.
  • Student loans: If you have qualified student loans and meet the necessary requirements, you may be entitled to take a deduction (up to $2,500) for interest paid during the year.

Tax planning strategies: Earnings and income

  • Deferring income: If you’re self-employed and generally use the cash method of accounting, you can defer income if you delay billing clients or collecting rent until next year. You may also be able to defer a bonus.
  • Capital gains: Use installment sales agreements to spread out any potential capital gains among future taxable periods. Note, however, that you cannot spread out gains on the sale of publicly traded stock or securities.
  • Changing tax brackets: If you expect your income to increase enough to change tax brackets next year, it might make sense to accelerate some of your income and pay taxes on it this year, at a lower rate.

Tax planning strategies for business income and expenses

  • Year-end expenses: Accelerate expenses such as repair work and the purchase of supplies and equipment in the current year to lower your tax bill.
  • Withhold more: Increase your employer’s withholding of state and federal taxes to help avoid exposure to estimated tax underpayment penalties.
  • Last-quarter taxes: Pay your last-quarter taxes before December 31, rather than waiting until January 15.
  • Depreciable assets: Section 179 of the Internal Revenue Code allows businesses to lower their current-year tax liability when they take an immediate deduction for business expenses related to depreciable assets, such as equipment, vehicles, and software. Otherwise, the business would capitalize the asset and depreciate it in future tax years.
  • Employer retirement contributions: You can usually make a contribution to your employer retirement plan at any time up to the end of the year.

Tax planning strategies for financial investments

  • Capital gains: Pay attention to capital gains tax rates for individuals and try to sell only assets held for more than 12 months.
  • Capital losses: Consider selling stock if you have capital losses this year that you want to offset with capital gain income.
  • Minimize your gains: If you plan to sell some of your investments this year, consider selling the investments that produce the smallest gain.

Tax planning strategies for your home and real estate

  • Mortgage payment: If it’s due before the fifteenth of the month, pay your January mortgage payment in December. That way you can deduct the accrued interest when you file the current year’s taxes.
  • Selling your residence: If you want to sell your principal residence, make sure you qualify to exclude all or part of the capital gain from the sale from your federal income tax. If you meet the requirements, you can exclude up to $250,000 (or $500,00 for married couples filing jointly). Generally speaking, you can exclude the gain only if you used the home as your principal residence for at least two out of the five years preceding the sale. In most cases, you can also use this exemption only once every two years, but even if you don’t meet these tests, you might still qualify for a reduced exclusion if you meet relevant conditions.
  • Consider an installment sale: You may be able to structure the sale of investment property as an installment in order to defer gains to later years.
  • Get more from your second home: Maximize any tax benefits you derive from your second home by changing your personal use of the property to adhere to tax guidelines.

Tax planning strategies for retirement plan contributions

  • Maximize your IRA: You can make the maximum deductible contribution to your traditional IRA, but did you know you can also contribute the full amount to your spouse’s IRA? In 2023, you may be able to deduct annual contributions of up to $6,500 to your traditional IRA and $6,500 to your spouse’s IRA — and you may be able to contribute and deduct $1,000 more if you’re at least 50 years old. Contributions to an IRA can generally be made at any time up to the due date, not including extensions, for filing a given year’s tax return.
  • Roth IRAs: You may also be able to make nondeductible contributions to a Roth IRA. The same dollar limit applies to all contributions to your traditional and Roth IRAs combined. Qualified distributions from a Roth IRA can be received tax free. If a Roth conversion does make sense for you, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you’d pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting.
  • Avoid withdrawal penalties: Unless you meet an exception, try to avoid early IRA payouts to avoid the 10 percent early withdrawal penalty.
  • Set up additional retirement plans: If you’re a self-employed taxpayer, set up a retirement plan for yourself. You can also set up an IRA for each of your children who has earned income.
  • Lower your Social Security benefits: Reduce your income so it’s below the applicable threshold to minimize the income tax on your Social Security benefits.

Tax planning strategies for charitable donations

  • Squeeze in last-minute donations: (cash or even old clothes) before the end of the year. Remember to keep all of your receipts from the charity
  • Take stock: Use appreciated stock instead of cash when you give to charities. Not only will it maximize your charitable deduction, but you may avoid income tax on the built-in gain in the stock.

Tax planning strategies for medical expenses

  • Maximize the use of itemized medical expenses by bunching them in the same year, as much as possible, in order to meet the 7.5 percent threshold percentage of your AGI.

If you want to make the most of your investments and income, Patelco members have complimentary access to CFS Financial Advisors.2 They can help you prepare for retirement and manage your investments and insurance. Make an appointment today!

1 CUSO Financial Services, LP does not provide tax advice. For such guidance, please consult a qualified tax professional.

2 Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Patelco Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

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