The end of the year can get hectic. There's the holidays, family stuff, and work deadlines. But most importantly, there are important year end tax moves to make.
The good thing about having multiple income streams is the financial security it provides. But, the bad thing about having multiple sources of income is a much more complicated tax structure. With 70,000+ pages to the tax code, things can get confusing.
I want to keep my Adjusted Gross Income to no greater than $250,000 a year due to AMT and deduction phaseouts that completely go away after this level. It's also very important to accurately predict your passive income.
Use Business Expenses To Save On Taxes
But as my online business grows, it gets harder to shield income. For example, one can only contribute so much to a 401K and SEP IRA. Meanwhile, I can't eat $300 business steak dinners every night with clients.
Nor am I willing to buy a luxury car to write off as a business expense. And I don't want to pay 4X the price for first class flights, let alone fly private. Maximizing ROI and minimizing waste is the way I like to run my business and my personal finances.
The majority of actions to reduce your taxes must take place during the calendar year unless you’re filing as a business entity on a fiscal year. Thus, reviewing your business expenses is one of the important year end tax moves for business owners.
If you want to pay less taxes, it’s worth setting aside some time during the holidays to wrestle this beast to the ground.
Noteworthy Rules About Deducting Charitable Donations
Tis the season for giving back. In the case of charitable donations, it's also a chance to get yourself a tax deduction. Keep in mind there are guidelines you have to meet in order to claim deductions on charitable donations.
The government doesn't allow deductions for items in poor condition. Nor can you get a tax break if you donate your car to your best friend. Here are several things to keep in mind with your charitable year end tax moves.
- You'll need to itemize deductions and file Form 1040.
- The charity organization must be qualified with the IRS and be actively tax exempt. This excludes political candidates and organizations, as well as individuals.
- Used items such as housewares and clothing must be in good condition or better to be deductible.
- Donated vehicles can be deducted at fair market value if you meet certain requirements. For example, the charity must sell your car well below market price to a person in need. Or, the organization must make major repairs to increase the car's value. Alternatively, you could qualify if the charity will use the car for purposes such as delivering meals to needy individuals.
- If the total of your non-cash contributions is greater than $500, you'll need to file Form 8283.
- You'll need a written record of all cash donations with the date, amount, and charity name. So keep your cell phone bills for text donations and any relevant bank statements.
More Notes On Charitable Year End Tax moves
- If you donate $250 or more in property or cash, you'll need a statement from the charitable organization detailing your gift and if any services or goods were given to you in exchange.
- And if you receive goods or services for a donation, you can't deduct your entire contribution. The value of what you received must be less than your donation, and you can only deduct the difference.
- If you are volunteering and performing services for a charity using your car, you can deduct mileage at 14 cents per mile. Since that's a really low rate, which hasn't been increased in many years, you're likely better off using the actual variable costs of gas/oil.
- Travel expenses can be deducted if you go on a trip with a qualified charitable organization. You'll need to be “on duty in a genuine and substantial sense throughout the trip” per the IRS.
- Donations of property are generally deducted at fair market value based on what they would sell for on the open market.
- You can avoid capital gains on appreciated stocks held over a year if you donate them to a charitable organization. The amount you can deduct is determined by the stock's fair market value on the contribution date.
Charitable Contributions Figures
Here are some statistics on average charitable contributions. The data is based on income for individuals claiming itemized deductions.
It is heart warming to see the sub $20,000 group give away such a high percentage of their income. Perhaps at this income level, it's all about giving and helping each other out to survive.
Here's another chart by the National Center For Charitable Statistics. It's interesting to see a dip in charitable contributions at the $200,000 – $250,000 mark.
I believe this dip correlates well with my target $200,000 – $250,000 ideal income level. In this range, your income is optimized to return the best amount based off taxes and deductions.
It's great to see those who make more than $10 million give almost 6% of their income away. That's at least $600,000 a year!
Capitalize Losses On Bad Investments
Another one of my important year end tax moves is to review your investments. This is when it's time to look closely at your bad investments.
If you own securities or property that have been declining, see if you're below your cost basis. If so, consider liquidating before year end if you don't anticipate a recovery.
Losses on property held for personal use can't be deducted however. Only investment property losses can be written off. And you'll also need to look at the net of your capital losses and gains. If your gains are higher than your losses, you'll owe money on the difference.
Property owners with a adjusted gross income of $100,000 or less may deduct up to $25,000 in rental real estate losses per year if they “actively participate” in such income.
You actively participate if you are involved in meaningful management decisions of the property. You'll also need to have more than 10% interest of the property. Once your income is above $150,000, the losses are phased out.
Note that you cannot deduct rental losses to your active income (e.g. day job income). Rental losses can only be deducted to passive income.
Unfortunately for stock investment losses, you're still only allowed to deduct $3,000 a year in capital loss deductions. I've had losses of $50,000 or more before that will take over a decade to deduct!
At least you can carry over unused losses into the next year and so on. $3,000 isn't a huge tax break for the year if you qualify. But, every bit helps when you're on a mission to pay less taxes.
Defer Income And Itemize Deductions
Another one of my key year end tax moves is to anticipate and prepare for changes to your income in the upcoming year. If your income is likely to go down next year, take as many deductions in the current year as possible.
You can make additional contributions to your 401k before year end if you haven't already maxed it out. And you can pay out charitable contributions you were planning on paying next year in the current year.
If you time things right, you could also use your credit card to your advantage. Deductions are based on the date your card is charged, not the date you actually pay off your credit card bill.
So you could make a donation in late December to benefit from a deduction, and not have to pay your credit card company until January.
Use Time To Your Advantage
Business who are cash-based, can defer taxable income to the following year by sending December invoices at the very end of the month.
The reason this can work is the business won't receive payment for those invoices until January or later. And, the business' taxable income isn't captured until the date the cash comes in.
Companies and sole proprietors can also reduce taxable income in the current year by charging business related expenses in November or December that they'd normally take in Q1 of the following year.
If you're not subject to AMT, you can also consider paying property tax installments and state taxes ahead of time. Accelerating these payments can help you benefit every other year and lower your tax burden for the current taxable year if your income will be dropping next year.
You can also try asking your employer if they can pay your year end bonus in the following year if you want to defer income. Back when I was working in finance we had the option to defer our entire year end bonus until some later date.
I never took them up on the option. But in retrospect, I should have since I had a lean year after I left my job.
When I have a very strong year for my online business, I load up on capital expenditures that I would normally pay next year.
For example, I'm going to prepay my entire next year's sever costs. I can't imagine my company continuing to grow at a double digit pace next year. So I'm going to forecast -25% to be conservative.
Review Your Flex Spending Account (FSA)
Another important item on my year end tax moves list is to review your FSA. Make sure you don't lose any money in your flex spending account. Perhaps you haven't spent as much as you anticipated yet this year.
Check with your employer if your plan is eligible for a rollover of unused funds. This is useful if you don't have any other expenses you can claim before year end. Your employer may have not elected to participate in this rollover feature, so check to be sure.
On the other hand, if you've already run out of funds in your flex spending account but have things like medical work or fillings to do at the dentist, try to postpone them until next year if they aren't urgent.
That way you can save on taxes by allocating enough funds in next year's flex spending account. You can cover those expenses next year and get the work done in early January.
Don't take your health care for granted. I've got to look for new health care, and it's daunting to see the $800 – $1,000 monthly costs for a healthy couple. Add on a couple of dependents, and the cost easily doubles when you're paying in full.
If you're planning on leaving Corporate America next year, get your physical done this year. Do every single test that you've been considering, but haven't. But if you don't have life insurance, apply for that first! You'll save a lot more money if there are fewer items on your medical record.
Ideas other than a physical include getting an MRI on your knees, doing a comprehensive allergy test, scanning your brain, and checking your skin for tumors. Fun stuff!
Consider Revising Your Withholding
Even though you probably submitted your W4 to your employer ages ago, you can still file a revised form to make adjustments to the remaining pay periods left in the year.
If you anticipate you haven't withheld enough taxes so far this year, you can increase your withholding to help reduce penalties and fees when you file your taxes.
Check if you've already paid 100% of your tax liability this year. If so and your AGI is less than $150,000, you should be able to avoid being charged a penalty.
But you'll need to have paid 110% of last year's tax liability this year to avoid getting dinged if your AGI is above $150,000. This safe harbor method is generally the easier option to avoid paying a penalty. The alternative is to have withheld 90% of this year's tax liability. But this can be difficult for freelancers and independent contracts to calculate.
It's also important to note if you are earning both regular W9 wages and 1099 income, bumping up your January 15th estimated tax payment to compensate for being under paid in previous quarters doesn't work.
Each quarter is treated separately with estimated taxes. However, withheld taxes on paychecks are treated as if they were paid throughout the whole year.
Review Your Retirement Contributions To Date Against The Annual Limits
The maximum 401k contribution limit for 2021 is $19,500. The article has a graph I created on how much you could have in the future if you methodically maxed out your 401k.
Even though this is the season of giving, don't forget to pay yourself first. Take a look at how much you've contributed to your retirement accounts so far to date. And, consider making additional contributions to the maximum.
If you only have one retirement account that is already maxed out, check if you're eligible to take deductions from opening additional accounts. You may not qualify if you have a high AGI, but it's always good to know what your options, especially if your income is likely to decrease in the future.
You're Losing Money If You Don't Know The Rules
Taxes are painful and boring as hell, but they are a must. I'm pretty sure practically every one of us is paying more taxes than we should because we don't know 100% of the rules. Here are the 2024 federal marginal income tax brackets in more detail.
I will be owing a relatively large tax bill, but I feel fortunate to have done well. As part of my year end tax moves, I plan to spend three hours organizing all my expenses. I want to minimize my tax liability.
Travel, meals, entertainment, vehicle expenses, electronic equipment, legal and accounting fees, solo 401k, and conference costs will all be deducted on my Schedule C. I'll then do my taxes myself and run some different income scenarios.
We don't know exactly how much more or less we'll make the next year, but we can make educated guesses. If you so happen to make much more the next year than expected, you should still feel good despite the additional taxes to pay.
It's all about forecasting a realistic income scenario and managing your expenses accordingly.
File Your Taxes For Free Or Very Cheap
If you like to do things yourself, file your taxes with TurboTax. They've made it super easy for everyone
There's no need to stress about filing your taxes anymore. Save your progress, maximize your tax deductions, get personalized help, and save money.
Manage Your Finances In One Place
I recommend signing up for Empower, a free financial management tool online. It helps you track your net worth, analyze your investments for excessive fees, and manage your cash flow.
I ran my 401k through their 401k Fee Analyzer and found out I was paying $1,700 a year in fees I had no idea I was paying!
They’ve also come out with their incredible Retirement Planning Calculator. It uses your linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes.
Tax Savings Recommendation: Start A Business
A business is one of the best ways to shield your income from more taxes. You can either incorporate as an LLC, S-Corp, or simply be a Sole Proprietor (no incorporating necessary, just be a consultant and file a schedule C).
Every business person can start a Self-Employed 401k where you can contribute up to $54,000 ($18,000 from you and ~20% of operating profits). All your business-related expenses are tax deductible as well.
Simply launch your own website like this one in under 30 minutes to legitimize your business. Here's my step-by-step guide to starting your own website.