As you get ready for the start of a new year, here are several end-of-the-year tax deductions to focus on now.
Table of Contents:
1. Give to Charity
Do you itemize your deductions and are you trying to bring down your taxable income a little bit? You can accomplish your goal and help a worthy cause by donating to charity.
Whether it’s tithing for your IRS-recognized religious congregation or giving a cash donation to the local food bank, it’s possible to receive a tax deduction for your generosity. You will need a receipt in order to take the deduction, so don’t forget to ask for one.
You can also donate items in good condition to charity. Itemize what you have, figure out the current market value, and take it to the local charity thrift shop. Ask for a receipt in the amount of the value of your goods, and you can deduct the total from your income.
You can also deduct mileage (at $0.14 per mile) if you drive your car on behalf of a charity.
There are apps, like ItsDeductible from TurboTax, that can help you keep track of your donations and figure out a value for them.
In order to take the charitable contribution deduction, you need to itemize your deductions using Schedule A.
Learn More: Valuing Non-Cash Donations for Taxes
2. Sell Losing Investments
Do you have some losing investments this year?
If you have assets that have lost value, now is a good time to sell–as long as you have a good reason to believe that the fundamentals have changed. If you are rebalancing your portfolio, or if you want to unload some fundamentally-unsound losers, you can sell at a loss.
First of all, your capital losses can offset any capital gains you realized this year. After that, if you still have losses left over, you can use up to $3,000 of that to offset other income.
If you still have losses, you can carry forward any amount over $3,000, to be used to offset income or gains in another year.
Capital losses can be carried forward indefinitely, so be sure to keep good records.
3. Max Out Your Retirement Account Contributions
If you contribute to a non-Roth qualified retirement account, you can enjoy a tax deduction based on the amount you set aside for your future.
A tax-deferred investment grows more efficiently over time. So, not only are you getting a tax deduction on the money you save, but you are contributing to your future comfort in retirement.
Make sure you stay up-to-date on the IRS contribution limits for the account you choose. Also, realize that there are income phase-outs associated with the amount of your contribution that you can deduct for some accounts (notably with IRA accounts).
Resource: Current 401k and IRA Contribution Limits
Both an IRA and a Solo 401(k) allow you to make contributions for this year up until Tax Day of next year, so keep that in mind as you prepare your taxes. You might be able to squeeze in one more contribution if it makes sense for you, tax-wise.
If you plan to open an IRA, here is a list of brokers that offer IRA accounts.
4. Boost Health Savings Account Contributions
Do you have a high deductible health care plan? If so, you might be eligible for a Health Savings Account, or HSA.
Your HSA is your money, and it rolls over from year to year. You will receive a tax deduction for your contributions. Plus, the money grows tax-free as long as you use your withdrawals for qualified health care expenses. This has the potential to be truly tax-free money.
Check the retirement contribution limits with the IRS. There are different limits for individuals and families, but there are no income limits associated with the tax-deductibility of your HSA contributions.
This is a great way to save for the future because you can use the money for health care costs at any stage of life. If you withdraw money for non-qualified expenses, the rules are the same as for a traditional IRA, including a 10% penalty for early withdrawals. Realize, though, that early withdrawal from an HSA applies until you’re 65, so that’s a bit of a tweak. As with a traditional IRA, you can contribute to your HSA until Tax Day following the year that just ended.
Lively HSA is a great place to begin looking into an HSA. Lively allows you to save or invest with your HSA and there’s no cost to open an account or any monthly fees. See how Lively compares to competitors in our list of Best HSA Accounts.
5. Double Down on Business Deductions
If you own a business, and you have been planning on making some purchases, now is a good time to fit them in.
Your business deductions can offset your business income, as well as any other income you might have to report. Business deductions include office supplies and equipment, business-related travel, the business use of your home, subscriptions to trade publications, and advertising costs, among others.
Even if you’re planning business travel for next year, if you can pay for the cost of it this year, you can deduct it now. Look ahead a few months to see what you might need and make those expenditures now.
6. Defer Your Income
Are you teetering on the edge of the next-highest tax bracket? Deferring some of your income might be a great way to save yourself some cash this year.
This one is fairly simple: it just involves holding off on accepting certain monies until after the first of the year.
If you know your boss gives out a hefty raise each Christmas, ask him to defer it to your first paycheck of next year. Self-employed? Then it’s even easier. Instead of sending those invoices in late December, wait until January 1st.
If you’ve thought about selling off investments or a home, which would result in a capital gain, wait until January to do so.
All of these things–combined with contributing the maximum to tax-advantaged retirement accounts, as mentioned earlier–will lower your taxable income and save you come April.
In order to claim employee-related or job-hunting expenses as a deduction, they need to equal 2% or more of your AGI, or Adjusted Gross Income. These can include home office expenses (if you telecommute), unreimbursed employee expenses, licensing fees for your job, a passport for a business trip, and a slew of other things.
If you want to reach that 2% threshold and are already close, you could make a few extra purchases this year. By combining some of this year’s expenses with some that would have been paid out next year, you can claim the deduction for the current year. Otherwise, by spreading it all out, you run the risk of losing the deduction for both years.
You could simply remodel that home office (assuming it’s used regularly and exclusively for work) like you’ve been meaning to do for years now. Perhaps you could prepay for that work-related continuing education course or your malpractice insurance for next year. Maybe you could buy new tools or pay union dues.
There are probably a few extra purchases you could make in order to bump up your expenses for this year. That will not only save you on this year’s tax bill, but you won’t have to worry about those expenses next year!
8. Bunch Up Medical Deductions
Along with your employee-related expenses, you should also think about ganging up your medical expenses now to snag tax benefits.
In order to claim a deduction for medical and dental expenses, they must exceed 10% of your AGI. For most of us with everyday medical bills, this isn’t enough to enjoy the tax benefits. However, you may be able to “bunch” your expenses to take advantage of the deduction.
If you have planned procedures for next year, it may be worth the tax benefits to prepay for them now, rather than wait until next year. This is especially true if you have a fair amount of medical expenses this year already, and adding in something scheduled for next year would put you at or above that 10% AGI mark.
For example, you could pay for your kids’ braces upfront, if you have the cash-on-hand, even if they won’t get them put on until after the new year. Do you get regular chiropractic adjustments, acupuncture, or physical therapy? See about paying for the next six or 12 months’ worth of visits now.
Order contact lenses in bulk, buy the kids new glasses, sneak in those annual exams, or prepay for the LASIK you want to get in the spring.
Be sure to calculate your current medical and dental expenses, though, to ensure that you can meet the minimum AGI threshold for a deduction. Otherwise, you might drain your savings to prepay for a bunch of services, and still not get the tax break.
9. Prepay Tuition
On another similar note, you could prepay for spring or summer college tuition expenses, in order to take advantage of the Lifetime Learning Credit or American Opportunity Credit. Both of these combined can snag you a whopping $4,500 in credits for this tax year. Get more details from the IRS here.
Even if you don’t qualify for the credits, you might still qualify for a deduction based on the education expenses you pay. If you have student loans, consider making extra payments, which could result in a tax break for the interest you pay.
10. Adjust Your Withholding
Do you think you’ll owe money on Tax Day? If that’s the case, you might want to contact your employer and adjust your withholding for the final weeks of the year. If you’ve paid less than 90% of your required taxes during the year, you’ll end up with a penalty.
This is a common issue for those who have income outside their regular jobs. For example, if you have a side hustle, earn dividends or have other business income, you might owe more than you’ve paid so far. Increasing your withholding from your regular paycheck can help you cover the tax bill and reduce the potential penalty.
11. Bonus Tip: Use That FSA!
This one is less of a “deduction,” and more of a “use your money before you lose it” tip.
If you have an FSA, or Flexible Spending Account, you are probably aware that they need to be used or you’ll lose those funds. Depending on your employer, you may be able to carry over up to $500 to the next year, or even have a grace period of up to three months in order to use those funds in the next year. (Be sure to check whether either of these apply to you–you could potentially lose the total balance come Jan 1).
However, if you just leave a bunch of money sitting in the account above and beyond that, it will be wasted. And that will probably be a lot more painful than the extra charity deductions you could have snagged. Do what you can to use that money before you lose it.
Be sure to consult with a tax professional. Just because we’re approaching the end of the year, doesn’t mean it’s too late. Spend a little extra money now, and you could save on taxes in the new year.