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End-of-Year Tax Prepping: What Should You Do By December’s End?

Most people are extremely busy from November through year end. The combined holiday season seems to get busier with Thanksgiving followed by purchasing Christmas gifts and putting up decorations. With all of the festivities, it can be easy to forget that tax season is just around the corner. By acting wisely and taking a few simple steps before year end you may be able to save a bundle on your taxes.

Defer Income and Maximize Deductions

ID-10082373The first step in reducing this year’s taxes is to defer some income from this year until next year. So a bonus paid on January 1st is better than one paid on December 31st. That way you won’t owe taxes on it for another whole year. Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don’t want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket. Another way to defer income is with a standard IRA which allows you to defer until you expect to be in a lower bracket when you are retired. It could also move you into a lower tax bracket now because that income is not counted towards this year. Even if you haven’t contributed to an IRA yet this year you can still do it. According to the IRS:

For 2015 and 2016, your total contributions to all of your traditional and Roth IRAs cannot be more than:

  • $5,500 ($6,500 if you’re age 50 or older), or
  • your taxable compensation for the year, if your compensation was less than this dollar limit

As long as you open an IRA account before year end and then you have until April 15th to fund it, in order to get the deduction for this year.

In addition to deferring income you also need to maximize deductions. For instance if you are making contributions to a charity you may be better off making them this year rather than waiting until January.

Gather Your Records

It’s important to gather your W-2s and 1099s to stay organized and have time to find documents that may be missing. You may need to wait to have your W-2 from your employer, and your 1099’s from your investments, which should arrive by January 31st. But that doesn’t mean you can’t begin getting organized. You can still collect your documentation for your contributions and deductible expenses.

Time Your Deductions

It’s important to prepare for deductions, which includes property taxes, home mortgage, and charitable contributions. If you’ve donated more than $250, you’ll need to have a written statement from the organization of the amount that you contributed. If you don’t have a statement yet, make a request for one immediately to ensure that it’s on hand when it’s time to file. By accelerating or delaying deductions like doctor’s bills, state taxes, etc. you might be able to clump enough deductions into a single year to do better than the standard deduction so in one year you get a bigger deduction and then the next you get the standard deduction and then the following year you get the bigger deduction again. But you need to beware of the Alternative Minimum Tax. If you are near the limit you might want to delay your deductions until next year to avoid triggering the AMT.

Take a Look at Your Investments

If you have losing investments it may pay to sell them before year end to get the deduction or to off-set gains realized this year. If your losses exceed your gains you can use up to $3000 in losses to reduce your taxable income. Any greater losses can be carried forward to future years.

Check Your Flexible Spending Accounts

If you’ve contributed to a Flexible Spending Account through your employer for health or child care you have to use it up by year end or you will lose it. This money avoids both income and Social Security taxes but you need to be sure to estimate your expenses exactly or you could lose it. So you might want to get some additional dental work, a new pair of glasses or an extra refill of your prescription before the money goes away. New laws also allow employers to adopt a “grace period” so be sure to check with your employer and see if are taking advantage of this benefit.

Find the Right Tax Return Preparer

Surveys over the years have proven that the amount of money that you get back on your tax return ultimately depends on the expertise of the person who helps you fill out the paperwork. The professionals at Karla Dennis And Associates recommend scheduling early on to avoid having to use someone who isn’t already booked. According to IRS.gov, you should choose someone who has a Preparer Tax Identification Number and has a fair service fee. If they file for more than 10 clients, they should be able to offer electronic filing.

Image courtesy of  SDmania and freedigiatalphotos.net

About Tim McMahon

Work by editor and author, Tim McMahon, has been featured in Bloomberg, CBS News, Wall Street Journal, Christian Science Monitor, Forbes, Washington Post, Drudge Report, The Atlantic, Business Insider, American Thinker, Lew Rockwell, Huffington Post, Rolling Stone, Oakland Press, Free Republic, Education World, Realty Trac, Reason, Coin News, and Council for Economic Education. Connect with Tim on Google+