Originally published Dec 3, 2015, Updated Oct 21, 2022.
Every November and December I meet with clients to engage in tax planning to minimize the cut Uncle Sam takes. I have decided to list 9 great year-end tax planning tips to help others save taxes. Make sure you always consult your tax professional before implementing these tips.
1. STATE INCOME TAX: Prepay state income tax. If you are expected to owe in April, it may be good to pay state income tax before year-end to realize a federal income tax deduction. Individual taxpayers use the cash method of accounting when computing taxes, so you must pay the tax before year-end to realize the deduction. In certain situations, this can now apply to businesses as many states have enacted pass-through entity (PTE) tax legislation in response to recent federal legislation.
2. TRADITIONAL IRA: Contribute to a Traditional IRA or increase your contribution to employer-sponsored retirement plans. These contributions are often tax-deferred and create a current-year deduction. You may be limited to the amount you can deduct based on your situation, so make sure you consult with your tax professional.
3. CHARITABLE CONTRIBUTION: Instead of making charitable donations in cash, consider making them with appreciated stock or mutual funds. You can deduct the full value of the security donated without having to realize a taxable gain for the unrealized gain of the security. Make sure you have held the investments for more than a year.
4. MORTGAGE INTEREST: Convert loans in which you pay interest that is not currently deductible into a home equity loan. You may experience a lower rate and in most cases, you can deduct the interest.
5. CAPITAL GAIN: Consider investing in stocks or mutual funds that pay dividends as opposed to CDs that pay interest. Dividends paid from qualified domestic corporations are tax-preferred and are treated just like capital gains. Capital gains have a maximum rate of 20% under current laws. Do you live in Utah? Be sure to check out our blog post about capital gains taxes in Utah.
6. ITEMIZED DEDUCTIONS: If your itemized deductions are close to the standard deduction every year, consider lumping your itemized deductions in one tax year, then use the standard deduction the other year. With this tool, you’re doubling up on itemized deductions or paying two years of deductions in one year. For example, if you contribute to charities every year consider saving the contributions throughout the year and making the contribution to the charity in January then making your regular contributions throughout the year. The video below is from our very own David Cash discussing itemized deductions on the podcast Cents & Cents-Ability with Heather Kelly.
7. CAPITAL LOSS: Sell investments that have an unrealized loss. By selling the investment and realizing the loss you can deduct a capital loss. If you have other capital gain income or qualified dividend income you can offset that income with the loss. If you don’t have the capital gain income you can offset up to $3,000 of a capital loss against other income. The remaining loss carries forward. The capital loss only expires if you do. Remember the wash sale rule (you cannot purchase the same investment 30 days before the sale or 30 days after the sale).
8. REAL ESTATE: Consider purchasing real estate. Residential or commercial real estate investments usually realize tax losses for the first 7 to 10 years and can offset other passive income. Be careful if your income is over $125K and not passive because the loss may be limited unless you are a real estate professional. If you want more information on real estate accounting and
9. BUSINESS: Invest in a business. Investing in certain types of businesses requires investment in machinery or equipment. These types of capital-intensive businesses provide great write-offs through depreciation. Generating tax losses can offset other ordinary, investment, and capital gain income.