U.S. Markets closed

Top 4 Year-End Tax Tips

TurboTax Staff
Woman sitting at her desk and writing in her planner.

Take action before the end of the year to lower your taxes in April

When it comes to your taxes, December 31st can be as important of a date as April 15th. That's because the end of the calendar year is the deadline for making some strategic moves that can save you money at tax time. Here are four of the best things you can do by year's end to reduce your tax bill.

1.  Make tax-deductible payments and donations

Sometimes spending money before the end of the year can result in tax savings. Payments you can make now that are tax deductible later include:

  • Estimated state income taxes due on January 15th
  • Property taxes that are due for which you've already been assessed (i.e. have a property tax bill)
  • Some or all of a major medical bill

Charitable contributions made before the end of the year can also lower your taxes. Remember, you need a receipt to claim all charitable contributions, regardless of their size. A receipt will establish both the amount you gave and the date you gave it, ensuring it can be claimed on this year's tax return.

Some charitable donations pack more tax-saving punch than others. For example, when you donate property that has appreciated in value, such as shares of stock, you are allowed to deduct the market value of the property on the date of the donation. This not only reduces your taxable income by the amount of the donation, but it also allows you to avoid paying capital gains tax on the appreciation of the property.

Charitable donations and most other tax-deductible expenditures require you to itemize rather than claim the standard deduction. Itemizing makes sense when the total of your qualifying expenses exceeds the standard deduction. For example:

  • If you're single and your qualifying expenses exceed $12,200—the standard deduction for tax year 2019—itemizing should result in tax savings.
  • If you're married filing jointly and your qualifying expenses are greater than the standard deduction of $24,400, itemizing should reduce your tax bill.
  • To find out if itemizing makes sense for you, check out the free version of TurboTax. It will calculate your qualifying expenses for you, based on your answers to our simple questions.

If you find yourself on the borderline between itemizing and taking the standard deduction (i.e. the amounts almost equal each other), you might benefit from a practice known as "bunching." This strategy involves timing your qualifying expenditures to maximize deductions in one year and minimize them in the next. For example, you could pay property taxes twice in one year—once when they are due and again before year-end—to maximize the deduction.

The next year, you would not take the deduction at all, because the taxes for that year were pre-paid. However, in the following year, you could again pay twice in the year. The same goes for your other deductions. Bunching them into one year will enable you to exceed the standard deduction and enjoy larger tax savings in one year and then take a large standard deduction in the following year when you don't have the expenditures.

2.  Unload losing investments

If you're thinking of selling a stock or mutual fund that has declined in value, you might want to dump it before the end of the year. That way, you can use the losses on that investment to offset the taxable gains on your other investments on a dollar-for-dollar basis. If your losses for the year exceed your gains, you can deduct up to $3,000 of your losses from your taxable income, regardless of its source.

If your losses exceed $3,000 for the year, don't despair. You can carry those additional losses over into the next tax year, canceling out taxable gains or deducting up to $3,000 from other income. You can continue to carry your losses over from year to year, offsetting income and reducing your taxes as long as you live.

3.  Max-out contributions to your retirement account

Tax-deferred retirement accounts are among the best investments you can make, because the earnings can grow tax-free from year to year, until you withdraw them in retirement. In addition, the contributions you make to a qualified retirement plan will reduce your taxable income for the year.

The deal is even better when your employer matches your contributions to a 401(k) retirement plan. This instantly increases your investment. Try to contribute the maximum amount your employer will match. If you can afford to contribute more, you can deduct up to these amounts in 2019:

  • $19,000 if you are under age 50
  • $25,000 if you are age 50 or over

You can also contribute to a separate individual retirement account (IRA). These contributions can also be tax deductible up to these amounts:

  • $6,000 if you are under age 50
  • $7,000 if you are age 50 or older

IRA contributions can be made up to tax day—April 15th in 2020. However, making the contribution before the end of the year will give your investment extra time to grow tax-deferred.

If you are a self-employed individual, you have separate options for reducing your taxable income by contributing to a retirement account. In addition to an IRA, you can establish a tax-deferred pension plan that's available to self-employed individuals or unincorporated businesses for retirement purposes.

As with a 401(k) and an IRA account, the contribution you make to Keogh plan can be tax deductible. The deductible amounts vary, depending on the type of Keogh plan you have. The end of the year is important for these plans as well. You must establish a Keogh plan by December 31st for the contributions to qualify for this tax year, although you can continue to make tax-deductible contributions until April 15, 2020.

4.  Track your flex plans

Many companies allow employees to put some of their earnings into flexible spending accounts (FSA), or flex plans, that can be used to pay medical or child care bills. The money in a flex plan is sheltered from both income tax and FICA deductions. However, the end of the year can loom large for these accounts, because of the government's "use it or lose it" rule. In some cases, you must use all of the money in the flex plan by the end of the year, otherwise the money is forfeited. The exception is when your employer has signed up for an IRS-allowed grace period. The grace period allows you to spend the flex plan money through March 15th of the following year.

If your employer doesn't offer a grace period, try to spend the excess funds in your account on medical supplies, eyeglasses, or medications before the end of the year. Be sure to check out the IRS list of approved expenses. You might be surprised by what's eligible! From items like SPF 15+ sunscreen to an ankle brace you bought online, these can count as eligible expenses. Next year, you can adjust the amount you are setting aside in the new year to compensate for these expenditures and avoid building up excess funds again.

For more smart year-end tax strategies, visit TurboTax.com. Remember, with TurboTax, we ask you simple questions and fill out the right tax forms for you based on your answers.

Brought to you by TurboTax.com