As you are wrapping up your financial year, you want to make sure to maximize any tax savings you can and start looking ahead to the next year. That means harvesting your tax losses in your portfolio, paying your mortgage for January of next year in December to get the interest deduction and donating to charity. Here are some other year-end tax tips—both what to do as you see out the Old Year and how to ring in the New.
You normally have until December 31st to donate to your favorite charities and non-profits for a tax deduction, but be sure to check with the institution first.
The IRS watches your itemized tax deductions (under which charitable donations fall) as part of the audit-flagging process on your tax return. You want to make sure you aren’t claiming an abnormal amount. If you do have a lot of charitable-gift deductions—and really, even if you donate just a normal amount—having solid documentation is key. The documentation needed depends on what you are donating to the charity or non-profit organization. If you’re donating…
- Money: Whether you’re giving cash, writing a check, or donating via credit card, you need to get a written or printed receipt of your donation. If you give regularly throughout the year, many organizations will set up a profile for you in their accounting system and provide a year-end statement of giving. Be sure to check it against your own records so that all the amounts tally.
- Items: Deducting the proper amount for donated items is key to not getting in trouble with the IRS. The government puts out a list of donated item values every year as tax season begins. Use it as a guide. Also, make sure you not only get a receipt, but take photos of the items you donate just in case you do get audited and need prove an item was in good, usable condition.
- Securities: You can donate securities to charities, but there is paperwork that needs to be filled out. Check with your accountant and make sure you get whatever you need from the recipient and the brokerage. It may have to be provided when you file your tax return.
Other Year-End Tax Tips
Looking to bump up the deductions and cut your taxes even further? Don’t forget transportation costs. You can deduct mileage for any legitimate time spent volunteering for a non-profit. The IRS consistently updates the mileage rates. In 2017, charitable driving can be deducted at 14 cents per mile. It might not be much (in fact, it’s less than the mileage rate for business- or medical-related purposes), but hey, every little bit helps.
Unless it doesn’t. Before scrambling to augment your itemized deductions via charitable gifts, first make sure you won’t benefit from just taking the standard deduction ($6,350 for single taxpayers and $12,700 for married taxpayers filing joint returns in 2017) instead. Don’t forget that itemized deductions have to exceed 2% of your adjusted gross income before they count. If a rough calculation shows your itemized deductions are nowhere near the standard deduction, don’t bother. If they’re close, it still might not be worth the hassle (and a possible IRS check).
Year-End Tax Tips for Next Year
Year-end tax tips include planning for the following 12 months. To prepare for next year’s income taxes you should be thinking about what went well this year, what didn’t go well this year, and what you need to change for next year. Also take into consideration any significant changes to your situation that would impact your income or tax bracket.
Analyze This Year’s Taxes
Look back at this year and see what went well. Did you use tax-advantaged accounts like an employer-sponsored 401(k) to cut down on taxable income? Make sure you continue to add to your 401(k); if you can afford it, increase your percentage of each paycheck that is invested (at least up to the maximum company match).
Did you get extra deductions for education costs that are disappearing after this year because you or a dependent are graduating? You might need to come up with some other deductions to balance out that lost reduction in tax liability. Or did you get a special tax credit this year that runs out and won’t apply next year? (It’s also important to know the difference between tax deductions and tax credits.)
What didn’t go well? Did you start a small side business and forget to pay your estimated quarterly taxes and had to pay a penalty at tax time? Set up a reminder on your computer so you won’t forget in the coming year. Were you paid a big bonus at work, but forgot to set aside some money for tax purposes because your employer didn’t collect withholding on the check? That can really ding you at tax time. Be sure to set aside some funds in a savings account so you’re ready to pay back the government if necessary.
Will Your Tax Situation Change?
A big part of planning for your income taxes is projecting how your finances might radically change. Here are a few ways you might owe a significantly different amount of tax next year:
- An increased number of dependents. Is your family growing? Having a child next year will give you an additional deduction on your taxes.
- Buying a home. Are you planning to buy a home next year? Unless you are paying cash for it, the interest you pay on the mortgage will be a tax deduction. Be sure to calculate how big an impact that interest will have because you still might be better taking the standard deduction.
- Investing for retirement. Did you just discover the tax benefits of using a Roth IRA? You pay taxes on the invested funds now, but never again. If you were using a Traditional IRA last year consider balancing your investment mix by funding a Roth IRA this year instead. (But know that if you slow down on the Traditional IRA contributions you will pay more taxes in a year when you contribute to a Roth instead).