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End of Another Tax Year

End of Another Tax Year

 

                Whether you are having a good year, rebounding from recent losses, or still struggling to get off the ground, you may be able to save a bundle on your taxes if you make the right moves before the end of the year.

                1. Defer your income - Income is taxed in the year it is received – but why pay tax today if you can pay it tomorrow instead?  It's tough for employees to postpone wage and salary income, but you may be able to defer a year-end bonus into next year – as long as it is standard practice in your company to pay year-end bonuses the following year.   If you are self-employed or do freelance or consulting work, you have more leeway.  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.

                2. Take some last-minute tax deductions - Just as you may want to defer income into next year, you may want to lower your tax bill by accelerating deductions this year.  For example, contributing to charity is a great way to get a deduction.  You must have a receipt to back up any contribution, regardless of the amount.   According to the IRS, about 75% of taxpayers take the standard deduction, but could be missing out on valuable tax deductions if they can itemize. If your qualifying expenses exceed the standard deduction, then you likely should maximize your deductions and itemize.

                3.  Contribute the maximum to retirement accounts - There may be no better investment than tax-deferred retirement accounts. They can grow to a substantial sum because they compound over time free of taxes. Company-sponsored 401(k) plans may be the best deal because employers often match contributions.  Try to increase your 401(k) contribution so that you are putting in the maximum amount of money allowed.  If you can’t afford that much, try to contribute at least the amount that will be matched by employer contributions.

                4.  Check IRA distributions - You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 70 ½. Failing to take out enough triggers one of the most draconian of all IRS penalties: A 50 percent excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year. After that, annual withdrawals must be made by December 31 to avoid the penalty.

                5.  Watch your flexible spending accounts - Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees steer part of their pay into a special account which can then be tapped to pay child care or medical bills. The advantage is that money that goes into the account avoids both income and Social Security taxes. The catch is the notorious "use it or lose it" rule. You have to decide at the beginning of the year how much to contribute to the plan and, if you don't use it all by the end of the year, you forfeit the excess.

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