Give Yourself A Gift Instead of Uncle Sam: Year-End Tax Tips

If give yourself gift instead is on your radar, this short guide cuts through the noise. Here is what is worth knowing, and how to put it to work today.

Key Takeaways

• Share with your friends!FacebookPinterestMessengerWhatsAppEmailShareFlipboardRedditSMSX As the end of the year approaches, time is running o...
• But there is still time to give yourself a present these holidays by decreasing your gift to Uncle Sam.
• Whether you’re looking to reduce your taxable income or score some tax breaks, these tips from experts can help.  canva.com Table of Co...

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As the end of the year approaches, time is running out to take advantage of opportunities to lower your tax bill this year.

But there is still time to give yourself a present these holidays by decreasing your gift to Uncle Sam.

Whether you’re looking to reduce your taxable income or score some tax breaks, these tips from experts can help. 

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Table of Contents

• Contribute To Your Retirement Accounts
• Realize Losses: Tax Loss Harvesting
• Defer Your Bonus
• Health Savings Accounts
• Contribute To A 529 Plan
• ‘Maximize Your bracket’ With A Partial Roth Conversion
• Help Yourself, While Helping Others
• Make a Contribution to a donor-advised Fund
• Lower Your Taxes
• More Articles From ChaChingQueen

Contribute To Your Retirement Accounts

One of the best year-end money moves you can make is contributing as much as possible to your 401k.

This will help lower your taxable income for the year and help you save for a more secure future and enjoy tax-deferred or tax-free earnings on your investments.

Greg Wilson, a Chartered Financial Analyst, suggests,”Try to max out your 401k. Numerous experts suggest striving to contribute at least the amount that your company matches. But by doing that you are limiting the amount of money you can save on your taxes.” 

He admits, “it is difficult for numerous people to max out their 401k. But that is money you owe to your future self.”

Another year-end money move that can help you save on taxes is to open an IRA and contribute to it before the year ends. Depending on your income level, you may be eligible for a tax deduction on your contributions. 

Realize Losses: Tax Loss Harvesting

Tax loss harvesting is a tax-saving strategy that involves selling investments at a loss to offset capital gains and lower your tax bill.

If done correctly, tax loss harvesting can significantly lower your taxes owed each year. While tax loss harvesting can be used at any time, it is frequently most effective at the end of the year. 

This is because you can use losses to offset gains from the previous year, which may help you avoid paying taxes on those gains.

Additionally, tax loss harvesting can offset other taxable income, such as interest and dividends. As a result, tax loss harvesting can be an effective way to lower your overall tax bill.

DadisFIRE shares a real-life example, “We sold a paid off rental house this year. To offset some of the capital gains we experienced, we have been actively harvesting losses all year.

As our taxable portfolio drops in value, we instruct our financial advisor to sell securities and realize the losses.  With the proceeds we then purchase similar securities.”

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Defer Your Bonus

If your income is higher this year then it will be next then defer your bonus to next year. By doing this, your income will take place in a year where you may be eligible for more tax benefits.

Health Savings Accounts

While you can’t exactly plan for medical emergencies, you can plan to take full advantage of your healthcare spending accounts before year-end.

Andrew Herrig, MS in Economics and founder of personal finance site WealthyNickel recommends funding your healthcare accounts.

He says, “If you haven’t maxed out your health spending account (HSA), be sure to put as much money in as possible to reduce your taxes and save for future medical expenses. And if you have a flexible spending account (FSA), make a plan to use it or lose it by year end.”

Contribute To A 529 Plan

529 investment accounts offer tax-free growth and tax-free withdrawals for qualified education expenses. 529 Plans are sponsored by states and colleges and are managed by financial institutions.  529

Plans offer two significant tax benefits: tax-free growth and tax-free withdrawals. 

Brett Green, PhD, offers this example, “Most states provide tax incentives for contributions to a 529 plan. For example, Missouri offers a tax deduction of up to $8,000 per year ($16,000 for married, joint filers) for contributions to a 529.

That means a married couple can save over $800 in taxes while saving for their children’s education.”  Brett is a Professor and Financial Economist at Washington University in St. Louis.

Plans are especially beneficial for year-end savers because they offer an immediate federal tax deduction for contributions made before the end of the year.

529 Plans are also good for state taxes in numerous states. For these reasons, 529 Plans are one of the best ways to simultaneously lower your taxes and save for college.

‘Maximize Your bracket’ With A Partial Roth Conversion

Drops in investment value are never fun, but there are silver linings when bear markets occur and Roth Conversions might be one of those bright spots for certain investors. 

With a significant drop in market value, now may be the time to take advantage of moving Traditional IRA/401k dollars into a Roth IRA.

The lower market values mean potential tax savings. Investors considering this strategy in the past may want a fresh look. 

Brian Hoeltge, CFA, Wealth Advisor with RubinBrown Advisors offers the following example. “At the market peak, an investor has $1,000,000 of qualified money and wishes to convert 10% of the portfolio into Roth IRA dollars.  She is married and files jointly and is in the 24% tax bracket.  At market peak, her conversion results in $24,000 of taxes to be potentially paid.  If she converts instead when her portfolio is down 20%, she only owes $19,200 in taxes, for a savings of nearly $5000 in taxes.  If the market rebounds, she recognizes that appreciation in a now tax-free account.”

Be careful though. Potential consequences of Roth conversions can impact how much of your Social Security is taxable and/or how much you pay in Final Thoughts

The bottom line: a little research on give yourself gift instead goes a long way. Compare your options, watch for seasonal offers, and never pay full price when a better deal is one click away.

Originally published at chachingqueen.com.