December is a busy month, and tax planning tends to get squeezed out by the holidays. That is a problem, because many of the choices that affect your tax bill must be completed by December 31, and some take days or weeks to process. Looking at your situation in late October or November leaves room to act calmly instead of in a rush.
Start with a projection
The most useful step is also the simplest. Estimate your income, deductions, and capital gains for the year, and see where you are likely to land. This tells you your approximate tax bracket and shows which of the other moves are worth considering. Without it, you are guessing. Your CPA can help build this, and the sooner it is done, the more options you have.
Review gains and losses in your portfolio
If you hold investments in a taxable account, year-end is a good time to look at what you have gained and lost. Losses can be used to offset gains, and up to a limited amount of other income, so selling a position at a loss can reduce your tax bill. If you want to buy the same investment back, be aware of the wash sale rule, which disallows the loss if you repurchase it within thirty days before or after the sale. It is also worth checking whether your fund holdings expect to pay out capital gains distributions before year-end, since those can create a tax bill even if you did not sell anything.
Use your retirement accounts
Contributions to a workplace plan such as a 401(k) generally need to be made through payroll by December 31, so the deadline for adjusting your contribution is earlier than many people think. IRA contributions can usually be made until the tax filing deadline, but making them early gives the money more time to grow. If you are subject to required minimum distributions, those are generally due by December 31 as well, and missing one carries a significant penalty. A Roth conversion also has to be completed by year-end to count for this tax year, which can make sense in a year when your income is lower than usual.
Think about giving and gifting
Charitable gifts count for this year if they are completed by December 31. Giving appreciated investments instead of cash can reduce the tax on the gain, but a transfer of securities takes time, so it should be started early. Annual gifts to family members are also measured by calendar year, and unused annual exclusions do not carry over. Both are easy to overlook until the last week of the year.
Use your flexible benefits
If you have a flexible spending account, check whether you have unused funds. Many plans require you to use the money within the plan year, with a grace period or limited carryover depending on your employer.
For business owners
If you own a business, year-end is also the time to review equipment purchases, retirement plan contributions, and your estimated tax payments. These decisions interact with your personal return, so they work best when considered together.
Plan now, not in December
Good tax planning is about making informed decisions with enough time to carry them out. At Mackeson, we work with your CPA to look at the full picture, including your investments, retirement accounts, and giving goals. If you would like a second set of eyes before the year closes, we would be glad to help.
This article is for general educational purposes and is not tax, legal, or investment advice. Tax rules change and individual situations differ, so please consult a qualified tax professional.
