The best time to start year-end tax planning is well before December 31.
If you had a lucrative year or had some life changes, your tax bill may be higher or lower than expected. The good news is that you still have time to make strategic moves that could reduce your taxable income and help you keep more of what you earned.
The key is knowing which moves make sense for your business and your personal tax situation.
Here are eight areas worth reviewing before the year comes to a close.
1. Look at Your Income Timing
If you are a business owner, you may have some flexibility around when income is received.
Review outstanding invoices, year-end billings, bonuses, and other income with your CPA. Depending on your expected income for this year and next year, shifting income between tax years may help manage your overall tax liability.
The goal: Make income timing part of your year-end strategy instead of letting December happen on autopilot.
2. Review Your Deductions
Before December 31, take a close look at expenses you already incurred and expenses you may want to make before year-end. Depending on your situation, this could include equipment, business expenses, charitable contributions, or other qualifying deductions. An experienced CPA can help determine which expenses may provide a tax benefit and when paying them makes the most sense.
3. Maximize Retirement Contributions
A retirement plan can serve two purposes: helping you build long-term wealth while potentially providing valuable tax benefits. Review your current retirement contributions and determine whether you have room to contribute more. Business owners may also have additional retirement plan options worth exploring. Before year-end, ask: Is your retirement strategy working as hard as it could for you?
4. Review Your Investments
If you have investments that have declined in value, talk with your financial advisor and CPA about whether selling certain investments could make sense. In our previous newsletter we dove into an important concept, tax-loss harvesting, click here to read about it. Tax-loss harvesting is selling investments at a loss to offset taxable gains, while avoiding a same-investment repurchase within 30 days (the wash-sale rule).
5. Check Your Estimated Tax Payments
A year with higher business income can create a larger tax obligation. Before the end of the year, compare your estimated tax payments with your projected income. This can help you understand where you stand and prepare for the tax payment that may be ahead. A year-end projection gives you something far more useful than a guess.
6. Review Major Purchases
Thinking about buying equipment, technology, vehicles, or other assets for your business before year-end? Timing matters, but not for the reason most people assume. Purchases like this can often be deducted immediately (Section 179, bonus depreciation) instead of over several years. That’s real savings, and it’s why “buy before December 31” is common advice. But a deduction only returns a percentage of what you spend. The purchase makes sense when your business actually needs it such as failing equipment, capacity you’re turning down work for. It doesn’t make sense when the only reason is the tax bill.
Talk with your CPA before you buy. Buy what your business needs first, then look at the tax benefit not the other way around.
7. Review Your IRA and Other Distributions
If you have traditional IRAs or other retirement accounts that require distributions, review your requirements before December 31. These required minimum distributions, or RMDs, generally kick in once you turn 73, and the rules can vary depending on the account type and your personal situation. Missing one or withdrawing less than required can create significant tax consequences: the IRS can impose a penalty of up to 25% on the amount you should have withdrawn but didn’t.
8. Schedule a Year-End Tax Review
This may be the most valuable step of all. Your tax return tells the story of what already happened. Tax planning helps you make decisions before the year ends.
A year-end review done well before December can give you an opportunity to:
- Estimate your current tax liability
- Identify potential deductions
- Review income timing
- Evaluate retirement contributions
- Look at major purchases
- Review investment gains and losses
- Plan for estimated tax payments
- Prepare for the year ahead
Your Tax Strategy Should Start Before Tax Season
You work hard to build your business and to build your savings. Year-end tax planning gives you an opportunity to make thoughtful decisions with the money you have earned. You do not have to figure it all out on your own. H&B CPA is here to help. We can review where you stand, identify opportunities, and help you make informed tax decisions before December 31.
Start your year-end tax planning today. Contact us here.