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Late Year Tax Moves

It’s that time of year again, year-end.  You know the one.  The time to make late year tax moves.

People tend to overlook the need to make late year tax moves.  It’s easy to do so with vacations, holiday parties, and bonus season.  But frankly it’s also the most important thing you can do to setup your finances in the month of December.

So what really needs to be done for late year tax moves?

Check FSA accounts, dependent care and health care, for remaining funds.    These accounts are use it or lose it.  So if you don’t use all the money in the account by year end then your contributions will be confiscated.

This one was an issue for us this year.  Our dependent care FSA had some remaining funds due to a technicality with the way our provider handled the money.  Apparently, by increasing my contributions mid-year (due to increasing daycare costs) they limit how much money from later in the year can be applied to expenses from before the increase.  Now they tell me. 

Anyway, had I not reviewed our FSA accounts I would not have realized our reported expenses will fall a few hundred dollars short of our contributions without some action.    Thankfully, we have some unreported expenses from the summer for which I can go back and collect receipts.  

Check Estimated Taxes.  Estimated taxes are due quarterly, but you can also be exempt from payment if you pay a certain percentage of last years tax bill or don’t owe more than $1000 when filing.    Not paying on time based on the quarter can result in a penalty.  So it’s important to take action to either pay your estimated taxes or adjust your tax bill in such a way to be under the limit.    The end of the year, as well as quarterly, are good times to check on whether you will owe estimated taxes for the year and make adjustments.

For those that have read my prior post on the subject, you know based on the way I have set my paycheck and RSU withholding I tend to just squeak under the $1000 owed point.  With new tax laws in place this was an even bigger concern then normal.  That being said a quick back of the envelope calculation of potential taxes owed shows I should squeak under the amount owed threshold for yet another year.

Speaking of adjusting taxes, now is also a good time to finalize your strategy with respect to Itemizing or standard deductions.  If you are itemizing there is still time to add to your donations, make medical payments, pay for health care, pay for education, pay for additional non-FSA funded child care, or pay for education depending on what you are allowed to deduct.  Your strategy for deductions might mean it is better to shift some of those expenses into this year or next to maximize your deductions.  Note, be careful to read about what items you can shift and by how much.  Sometimes there are restrictions.

Check your Health Care Deductibles and out of pocket maximum.   If you are over the deductible or out of pocket maximum now might be the time to schedule a last minute doctors visit or procedure rather than wait until the number starts over.    It could mean the difference between paying the entire amount out of pocket or your insurance covering a procedure.

The only times in our lives we have hit our deductibles are the two years our children were born.  In the two Decembers following these events you better believe we took advantage by proactively scheduling appointments and procedures for minor concerns.    I’d estimate these steps have saved us about $10K between the two years.

For those of you with businesses, now may be the time to invest in your business.  Business expenses lower taxable business income.  If this has been a particularly profitable year, or other sources of income have been particularly profitable, you may want to shift business expenses forward to lower this year’s taxable income.      

With a shifting economic environment in the year ahead, there is a risk my wife’s business income could slow down in the new year.  As such, we pushed forward this year on creating an office space for her in an unused room in our basement.    By pushing it forward we can use those costs as business expenses and deductions this year when revenue is potentially higher.

For those investing now may be the time to Tax-Loss Harvest your losing stocks.  You can use the losses to offset capital gains or as a deduction on ordinary income (regardless of whether you itemize up to $3000 per couple).  With the market down right now it might be a good time to execute this strategy.  I am not currently utilizing tax loss harvesting. 

Note today we do not utilize tax-loss harvesting.  The main reason is I don’t currently hold any losing stocks.  I’ve been holding positions for so long if it doesn’t have the risk of a wash sale it’s heavily in the money.    That being said if you have individual stocks in the negative, and you navigate the wash sale rules appropriately, late year is the perfect time to make this tax move.

Consider topping off any retirement accounts you haven’t maxed out.  Check how much you’ve placed in your 401K, IRA, 457K, HSA, etc for the year.  In some cases you are nearing your last opportunity to increase your input for the year (note some items like employer contributions to solo 401K allow movements until tax filing day).      Maximizing these accounts defers taxes thus decreasing your tax bill for the year.

My 401K and our HSA are on autopilot.   Our IRAs are paid into the first month of the year from the sale of my RSUs.  Still at the end of every year I analyze my wife’s business income and make decisions on her employer contributions to her Solo 401k.  

A note, overpaying employer contributions to a solo 401K can be a nightmare.  You can contribute to them as an employer up until filing of taxes.  In my case, I pay a small amount of money into the employer contribution.  I then set aside additional funds based on my estimates.  Our biggest income month due to RSU is always December, so now is the time we have the funding.  That money will eventually be pushed in at tax filing time.

Have You Made Any Year End Tax Moves?

Every year I go through the above list and every year I find a few are applicable.  Given the potentially massive savings (after all taxes can exceed 1/3 of your income for some) I find the time well spent.  Are you executing any late year tax moves I may have missed?

As always please remember I am not a tax attorney.  Any and all actions you take are your’s and your’s alone.  Full Time Finance is for entertainment purposes only.

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