Year End Tax Planning, Start Planning Now!

Year after year it never fails that the age-old misconception about tax preparation rears its ugly head in the form of comments like “I want you to get me back as much as possible” or “Last year my tax guy let me deduct my dry cleaning expenses for my suits.”

The misconception I’m talking about is that tax preparation is some sort of black magic whereby CPAs have conspired against the general public to keep people from getting money back. WRONG. CPAs do not have it out for you, but we are bound to abide by certain rules and principles.

What is Year End Tax Planning?

When you’re doing tax planning you’re trying to predicte your income and expenses for the next year and how much in taxes you’ll owe then. Then timing expenses to be paid at certain times and withholding the proper amounts so you don’t remember a surprise tax bill.

Tip Tax Planning for Next Year

While I can’t give you tips on how to get more money back, I can share ways that can help your CPA help you prevent owing Uncle Sam money when tax time rolls around.

• Adjust your W4 withholdings – Increasing your withholdings will reduce the likelihood of you owing money at the end of the year.
• Pay or increase quarterly tax payments – Similar to adjusting your withholdings, increasing your quarterly payments won’t change your overall tax liability but it will prevent you from getting hit with a large lump sum at the end of the tax year.
• Contribute to a retirement account – Contributing to a retirement account (401K or traditional IRA) forces you to save but also reduces your taxable income. Unlike the first two options above, this is a tax savings for the year instead of a shift in timing.
• Time your medical spending – Understanding the itemized deduction requirements for medical expenses and timing your medical spending accordingly can be the difference between a large tax refund and you missing the 7.5% adjusted gross income (AGI) floor to deduct medical expenses…again.
• Contribute to charity – Donating to charity can be a great way to reduce your tax liability, particularly if you’re donating property that still has some value (e.g. used car, clothing).

While there are even more ways to do year end tax planning and lower the taxes you owe, the one thing that remains constant no matter what kind of taxpayer you are is that you need to plan ahead. Once the tax year has already ended, you’ve lost virtually any flexibility available to you to manage your tax liability.