As the holiday season approaches and you start to think about your New Year’s resolutions, it’s important to keep in mind that there are still some tactical things you can do before the end of the year to help save costs, maximize benefits, and more importantly, reduce your tax bill come April. While everyone’s situation is different and not all items will apply to you, I wanted to make a checklist of things you should think about doing before December 31.
For everyone…
- General
- Take stock of where you stand year-to-date of your income from various sources:
- Earned income
- Passive income (e.g. From rental property)
- Investment income (interest, dividends, realized capital gains or losses, mutual fund capital gains distributions)
- Distributions from a retirement account, pension, annuity, etc.
- Social Security benefits
- Estimate what your income will be for the remainder of the year
- Plan out itemized deductions
- Based on your estimated income this year and next year, you may want to accelerate deductions this year or push them into next year
- “Bunch” itemized deductions if you have a particularly high-income year and will not be subject to AMT. This is where you combine deductible expenses (such as medical procedures, pre-paying property taxes, charitable donations, etc.) into a single year to maximize your deductions.
- Consider a Roth conversion
- Take stock of where you stand year-to-date of your income from various sources:
- Investments – Taxable Brokerage Accounts Only
- “Harvest” investment losses to offset capital gains. Be careful not to trigger any wash sale violations.
- Accelerate investment gains. If you will be in a tax bracket where long term capital gains are not taxed, it makes sense to realize gains now and reinvest the money at a higher cost basis, so your taxes will be lower in future years.
- Avoid new investments into mutual funds that will distribute capital gains before the year ends
- College Funding
- Make sure to take distributions from 529 Plans or Coverdell ESAs if you had qualified education expenses during the year
- Family/Legacy Planning
- Charitable contributions
- Finalize gifting to take advantage of annual gift exclusion
- Make 529 contributions for kids or grandkids
- Be careful to avoid the “Kiddie tax” if you plan on gifting stock to dependent children
If you are still working…
- Employer Benefits
- Take advantage of any “use it or lose it” Flexible Spending Account money that cannot be rolled over to next year
- Maximize 401k employee deferrals (Traditional vs. Roth 401k).
- Enroll or re-enroll for benefits during your open enrollment period
If you are retired…
- Plan Your Cash Flow
- Estimate how much you will need throughout the next year and determine the most efficient sources for the money to come from.
- Sources may include:
- Pension income
- Social Security
- Taxable brokerage accounts
- Traditional IRA accounts
- Roth IRA accounts