The Holidays are quickly approaching, and with that the end of the year is right around the corner, and then the start of tax season! Here we have some important end of year tax tips to help you save time and money on your taxes.
With tax season quickly approaching, it is never too early to start tax planning. We get it, the holidays are upon us, and the last thing on your mind is probably tax strategy.
However, by strategizing around your business and tax profile, you can find easy to implement year-end tools that can save a significant amount off of your tax bill and even pay some of that credit card debt you’re accumulating this holiday season.
We cover a few ways you can save thousands below with a little planning. We begin with simple strategies then, hold on, move into complexity.
#1 Defer Income
One age-old tax planning strategy that can help lower your tax bill, is to defer income until the new year. You may want to consider this method if you are on the cusp of a higher tax bracket or if you have a large contract that came in at year end that can be postponed.
By deferring your income to the following year, that revenue gets recorded in the next tax period (one year later). Be conscious of this since what you’re essentially doing is “kicking the can down the road,” leaving income to be dealt with later.
You should be conscious of your income forecasts for the next year. If you’re in an even high tax bracket, over the two-year period you would have paid more than just paying in the current year. On the flip side, in a scenario where you’re making less the following year, this strategy becomes advantageous since you’re receiving the income at a lower rate. You can keep tabs on these kinds of trade offs by a year to date versus projected profit and loss report.
Generally what some clients do is defer income by sending invoices in January instead of December or holding onto checks into the new year.
Also note that you need to report your numbers on a cash basis in order to employ this strategy and the next one that we cover below.
#2 Accelerate Deductions
As all business owners know, increasing tax deductions is the primary means through which taxable income can be decreased. What most business owners don’t do is assess their tax deductions throughout the year as a part of a comprehensive tax planning strategy. You don’t want to be way under and you don’t want to have significantly more deductions than the industry norms and risk an audit.
Knowing when you’re light versus heavy on deductions in your business not only allows you to assess your tax and risk, but also highlights which strategies are available and should be employed. This can be easily checked by running a forecast or tax projection during the year before the “ink dries” on your financials.
Last Minute Tax Deductions
As the end of the year approaches, you may be looking for some last-minute tax deductions to help lower your tax bill.
Does your office need some new equipment? I often ask clients, would you rather buy a $3,000 Macbook Pro, contribute $6,000 to your retirement, or write the U.S. Treasury a $1,000 check?
That trade-off is going to depend on your tax bracket, your tax withholdings, and your own personal views: how you think about business investment, retirement, and tax. We are careful to give you options, not tell you what you should do–if you have an advisor that is just going to give you their opinion without understanding your specific situation and perspective, you may want a new advisor. The point is that timing and clarity is important–something that can be solved by forecasting income and tax.
It’s critical to understand where you are with your numbers before year end not just for those who owe, but for those that will get a large refund. Because if you’re in a loss position business-wise, you may just be able to sit pretty, collect a refund, and employ your capital however you choose instead of letting the U.S. Treasury hold onto your cash interest free.
#3 Contribute To Your Retirement
One of the best end of year tax tips we can offer is to contribute to your retirement accounts. Contributing to your retirement is one of the best things you can do for your financial future and also for your tax situation. If you contribute money to your IRA, you are allowed to deduct up to the maximum contribution limit of $6,000 per year.
This is an above the line deduction, which means you can claim the deduction even if you do not itemize. With this deduction, you have until tax day, April 15, to make a contribution for the tax year in question, so you have a little more time on this one, but it is good to start thinking about it.
#4 Invest In Career Training
Career advancement and educational expenses are tax deductible, so if you want to take a class or attend a seminar that is business related you should do so. Better yet, if you need some extra tax deductions, schedule that class or seminar before the end of the year. Not only is additional training an investment in yourself and your business, it can also be good for your tax situation.
#5 Give A Little
As the season of giving approaches, supporting one of your favorite charities is a good end of year tax tip that can help you save on your taxes, spread a little holiday cheer, and help someone in need. You can donate goods or money, just be sure to keep good records of all transactions. This may include pictures of donated goods, appraisals for large ticket items, written and signed acknowledgement of donations, bank and credit card statement, and cancelled checks. When making charitable donations it is important to be aware of the tax limits. For donations to organizations like churches, educational institutions, and hospitals the limit is no more than 50% of your AGI. For other organizations like non profits, the limit is no more than 30% of your AGI.
Looking for ways to save on your taxes? Set up a consultation with one of the tax experts at The Tax Hack Accounting Group. For more end of year tax tips subscribe to our newsletter.