It’s coming soon – and we don’t mean Christmas or Hanukkah. While the deadline to file income taxes is still more than four months away, now is the time to get serious about tax planning.
That’s because some moves need to be made by Dec. 31 if you want to take advantage of certain tax breaks. Plus, the sooner you get organized, the sooner you can get your taxes filed and your refund (if any) in hand.
“Start getting organized early,” says Lisa Greene-Lewis, CPA and tax expert for TurboTax. Gathering up documentation about business expenses, charitable donations and other potential opportunities for deductibles from this year will save you time and headaches later.
If you’ve experienced a life change, you may need time for additional preparation. Those changes include starting a business, moving for a job, buying a house, suffering an expensive health crisis, getting married or having a baby. For example, to claim the baby as a dependent, you will need to apply for the child’s Social Security number if you haven’t already.
If you have a complicated tax life or have questions about your tax situation, this is a good time to set up a call or meeting with your accountant.
This is also a good time to interview accountants if you’re looking for a new tax preparer. “We’re at one of the slowest points of the year right now,” says John McCarthy, managing member of McCarthy Financial Planning in Cincinnati, Ohio. That means that accountants will have time to meet with you that they won’t have if you call in February – or later than that.
Evaluate where you are on your tax payments, whether taxes are deducted from your paycheck or you’re self-employed and you pay quarterly estimated taxes. (Another payment is due Jan. 15.) Look at your income and expenses and evaluate whether you are going to need to come up with a big cash payment.
If things aren’t looking good, you still have time to increase your deductions before the year ends.
“We don’t want to pay any more taxes than we have to,” McCarthy says.
Here are 11 tax moves to make before the end of the year:
Keep an eye on tax extenders. More than 50 tax breaks expired Dec. 31, 2014. While Congress is expected to extend most of those, and make them retroactive for the 2015 tax year, nothing is guaranteed. Among the tax breaks hanging in the balance are the ability to deduct state and local taxes and the ability for taxpayers who are 70 1/2 to donate up to $100,000 from an individual retirement account to charity.
Open and fund retirement accounts. If you earn money from self-employment, you are eligible for additional tax-advantaged retirement savings beyond your IRA. The deadline to open a SIMPLE IRA was Oct. 1, but you can still open an individual 401(k), Roth or traditional, until Dec. 31. The contribution deadline varies by type of entity. The deadline to contribute to other retirement accounts is usually April 15, or whenever you file your taxes, but there is some variation among types of accounts. If your 401(k) or 403(b) is through your employer, your deadline for contributions is Dec. 31. “You’re saving for your future, and you’ve also saving on taxes,” Greene-Lewis says.
Organize your materials. If you use paper, this means getting all your receipts and other paperwork together. If you use online organizing tools, apps or software such as Quicken or QuickBooks, make sure all your information is entered and properly categorized. This is also a good time to set up or refine your organization for next year.
Decide who will take dependents. Only one parent can deduct a child as a dependent or claim the Earned Income Tax Credit in a shared-custody situation. Talk to your ex and determine which option makes the most financial sense for all of you.
Spend your Flexible Spending Account funds. Many employers allow you to keep $500 in your FSA account until the next year without losing it. But if you have more than that in unused funds, you need to spend the money by the end of the year to avoid forfeiting it.
Give to charity. This is a good time of year to donate items you no longer need or to write checks to the less fortunate. “You’re helping someone in need, and you’re reaping the benefits of a tax deduction,” Greene-Lewis says. Be sure to keep records of your donations. Consider photographing goods you donate to remind you what was included in the donation.
Accelerate deductions or delay income. Make your mortgage payment early, pay property taxes, tuition, medical bills or other deductible expenses now to increase this year’s deductions – unless you’d be better off financially deducting those items next year. You might also be able to delay bonuses or other income until next year if that’s a better move.
Balance capital gains with losses. You may have sold stocks or other investments this year at a profit. If you are considering selling some at a loss, you can offset some of your gains.
Revisit your business structure. If you own a business, how you are taxed depends upon what corporate entity you choose: sole proprietorship, LLC, S Corp. or C Corp. Consult with your accountant about whether it’s time to change your business structure.
Update your Affordable Care Act financials. If you estimated this year’s income wrong when you applied for an ACA health care plan, you may have to pay back part of your subsidy, and if your income is more than 400 percent of the poverty level, you’ll have to pay back all of it. If your income was less than you estimated, you will get a tax credit. Use what you know about this year’s income to estimate next year’s income. The tax penalty for not having insurance is $325 per adult or 2 percent of your income, whichever is greater. If you quality for an exception from the requirement, you will need to apply before you file your tax return.
Give gifts from your future estate. If you want to reduce the amount your heirs will face in taxes, you can give them money from your estate while you’re still alive. You can give any number of people $14,000 each ($28,000 for a couple), and they pay no tax on the money. You can also pay educational or medical bills on their behalf, as long as you pay the provider directly.