- Pay January’s expenses in December. If you expect income next year to be similar to or lower than this year, pay January’s mortgage payment and real estate taxes in December. If you are self-employed, prepay rents, utilities, advertising costs and other business expenses.
- Defer income until next year. If you are expecting a big Christmas bonus, ask your employer to postpone it a couple weeks. If you are self-employed, send out December’s invoices in January. As with many of the strategies outlined in this document, deferring income should only be done if you expect next year’s income to be similar or lower than this year’s (if you expect your income to increase substantially, you may wish to defer expenses and increase income).
- Contribute to your retirement account. Consider increasing your contribution to your 401(k) plan, 403(b), IRA or other qualified plan for the last few weeks of the year. In the special case of a traditional IRA, you have until April 15th of next year to make a tax deductible contribution for the current year. As with all strategies, the total tax savings of contributing to a retirement account depends on your marginal tax bracket. For example, someone in the 25% marginal tax bracket would save $250 in taxes per $1000 of contributions.
- Make a charitable donation. If you are thinking about donating to a charity or church, why not do it before the New Year? Money donated to a charitable organization in December will likely generate tax savings a year earlier than money donated in January. Clean out your closet and donate old clothes to a nearby charity. Appreciated stocks that you have held for longer than a year can also be donated in order to receive a tax deduction and avoid capital gains taxes.
- Pay your children. If you own an unincorporated business, you can pay your minor children to work in the business without paying social security and Medicare taxes on their wages. This can be a great opportunity to transfer income into a lower tax bracket. If your children have worked for you during the year, be sure to pay them by December 31. Remember to keep in mind state laws concerning minimum age requirements and other regulations.
- Sell loser stocks. Look carefully at your portfolio. Do you have any stocks that have lost a lot of value and have little chance of rebounding? Sell such “loser stocks” before the end of the year to offset any capital gains incurred during the year. After you have offset your capital gains, you may deduct up to $3,000 of capital losses against your ordinary income.
- Clump similar expenses into the same year. Some expenses, such as medical expenses and unreimbursed employee expenses, will not result in any deduction unless they exceed a certain amount. Medical expenses, for example, are only deductible to the extent they exceed 10% of your adjusted gross income (AGI). Someone with an AGI of $100,000 would not have deductible medical expenses unless those expenses exceeded $10,000. In that situation, paying $8,000 of medical expenses in this year and then another $8,000 next year would not result in any tax deduction. If these expenses could be somehow “clumped” into one year so as to exceed $10,000, a tax write-off would result.
- Prepay college costs. The IRS offers large tax credits and deductions for out-of-pocket education expenses. Paying tuition for you or a dependent before the end of this year will allow you to claim those credits and deductions on this year’s tax return. For example, you may want to pay the winter semester tuition bill in December. If you or a dependent is an undergraduate student who qualifies for the American Opportunity credit, be sure to spend at least $2000 on tuition and qualifying expenses during the year if at all possible, as you may be able to qualify for a 100% tax credit on this amount.
- Convert to a Roth. Converting retirement funds from a traditional account to a Roth account creates taxable income;
however, it can enable tax-free distributions in the future. If your income recently decreased, this could be a great year to
make a conversion. Contact one of our CPA’s to determine the proper amount and timing.
- Form an S-Corporation. If you own a business, electing to be taxed as an S-Corporation can potentially save you several thousand dollars in taxes. Since this is a complicated area of tax law, be sure to consult with one of our CPA’s before implementing this strategy.