Important Year End Tax Moves To Make To Save Money And Grow Wealth

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.

My income sources come from investment income, rental income, W2 income, deferred income, K1s, and 1099 income. My goal is to shield as much income from taxes as legally possible.

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.

Average Charitable Contributions by income

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!

Average Charitable Giving By Income

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.

Related: Mortgage Interest Deduction Limit And Phaseout

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

2024 Income Tax brackets - year-end financial moves to make

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.

Do you plan to make more money next year?

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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.

Start a simple business to pay less taxes and contribute more to pre-tax retirement accounts
Start a simple business to pay less taxes and contribute more to pre-tax retirement accounts

About The Author

35 thoughts on “Important Year End Tax Moves To Make To Save Money And Grow Wealth”

  1. Hi Sam,
    I would like to start my own blog. But can my blog be considered my business from day 1?
    When my blog goes public, does it mean I can deduct my home office/laptop expense right away or I will have to wait until my income exceed my expense to deduct cost?

    Also, I heard that meals and travel are only 50% deductible, is it right?
    Thanks in advance.

  2. Another idea is to alternate between itemized and standard deductions every other year. Then make charitable contributions on a 2 year cycle to coincide with your itemized years. You can still play the Jan 1, then Dec 31 game so they effectively get their contributions annually. This works especially well if you have paid off your mortgage and so have lost the annual interest deduction.

  3. Ask your employer if it is possible to commit part of the year end bonus into 401k (your contribution + employer shoudl max 52k 2014, 53k 2015). There are rules about ratios and abs values between highly-compensated and not highly-compensated but this is up to employer. If possible you can shield extra 20-30k @~20-25% average tax rate you save about 4-7k and it goes into tax shielded account.

  4. At health care enrollment now I’m asking myself why I haven’t funded a Health Savings Account before. Seems to me an HSA not expiring within a year like a FSA makes it a perfectly suitable tax shelter for a few more dollars given my 401k contributions are maxed at $24K.

    What could it hurt to have a few thousand carry into each year and maybe into my senior days. I could easily spend the dollars then on filling the donut hole or some other care.

    Thanks,

    1. Maximize your deductions by doubling up lump-sum medical insurance payments in alternate years. The reduction of the medical deduction by 10% of your AGI becomes less worrisome and your HSA account can help bridge years you otherwise cannot deduct medical expenditures – either because you didn’t meet said threshold, or you took the standard deduction.

  5. I will have about $1,100,000 in personal income this year but have minimal deductions. I will have $13,000 in mortgage interest, couple of kids, and I will fund $52,000 in my SEP. Very few business expenses. What else can I do?

    1. Align yourself with a cash-poor relative who has large medical bills. Be able to qualify them as a dependent and hope they will remember you in their will.

    2. Find a charity whose mission statement aligns with your own, and get involved. And give. If you can donate appreciated stock, you not only don’t pay any gains on the stock, but you also can deduct the full value against your income.

      Keep in mind every dollar you donate only costs you 50 cents or so, depending on what state you live.

  6. I think that the charitable contribution data is skewed. The last column of your table says “% of Itemized Filers Claiming a Deduction,” and lists 4% for incomes under $20,000. I’m not sure if that means that only 4% of those who itemize claim a CHARITABLE deduction (presumably the remainder of their itemized expenses would be mortgage interest?) or if it’s inaccurately labeled and should read “% of Filers who Itemize.” Either way, it indicates that the data is only based on 4% of the people making under $20k. I don’t think it’s reasonable to assume that the average for the entire group of people under $20k is 7.80% – especially based on IRS statistics, since that data wouldn’t typically even be reported for someone who doesn’t itemize.

    That said, it is shocking how little many people in the upper income levels donate on a percentage basis.

  7. If W2 is your only income; can one bump up your number of dependents so you have less tax deducted every pay check without risking penalties?

    1. Be careful, you want to match your withholding to your expected tax liability. The goal should be a small refund.

      1. Krantcents – My goal is not to have a refund. Do you have any information in terms of actual tax code or IRS rulings regarding the situation I mentioned above?

  8. A great way to simplify charitable giving is to do what Bill and Melinda do — set up a charitable remainder trust. Luckily, Fidelity Investments has done all the work for you. Go to fidelitycharitable.org to learn more. Minimum contribution is $5,000.

    I set ours up nearly two years ago and it has been gratifying contributing to worthy charities from investment gains, only, spewing forth from our initial investment.

    I am not affiliated with Fidelity Investments in any way, although I did sit next to Abby Johnson at a wedding nearly 30 years ago. She didn’t talk to me. At all. It was a bit awkie.

  9. To reduce cash on hand you can prepay your property taxes in December for the following year.

  10. I agree with most points. As I continue accumulating assets/investments, I try to incorporate a bit of tax planning into my overall picture.

    For example, non-qualified dividend and interest-bearing investments are more favorable when held in a tax-advantaged account, while low(er) distributions are better (from tax perspective) in taxable accounts. Same with holding a little bit of real estate in order to receive taxation advantages of deferring some taxes until later.

    Great point though. Taxes really are one of the biggest group of expenses right up there with housing for most people.

    I do feel fortunate to have the great income, so I don’t worry a whole lot about the tax impacts; but I have started paying a bit more attention and will definitely try to allocate better moving forward. It’s a relatively small impact today, but year after year it surely adds up and eats away at some returns if I’m very sloppy.

    Glad I still have W2 income to just lower my withholding exemptions. It will be both a great (and a little sad) when I have to withhold extra in order to pay up for investment income taxes.

  11. Great article. This will be my first year doing my taxes myself. Kind of nervous as there is a lot to learn.

    The only thing I’d add to your article is to max out your HSA for this year if it’s not too late. It’s a small but fantastic tool. I plan to continue to max it out every year until I retire, and in the meantime pay out of pocket for any medical expenses.

  12. I think of taxes like a game. It’s fun to learn the rules, come up with ideas on how to win by a larger margin, and then game those rules out.

    You put together a great list, I have nothing to add there. But I do spend some time during the holidays gathering my tax material so I can do my taxes as soon as I get my w2s. If I’m owed money, I’ll file as soon as the IRS allows. If I owe money, I’ll wait until closer to the deadline. Ideally, and in most years, I’m within 1% of total revenue thanks to forecasting and adjusting my withholdings.

  13. Financially Stable

    Very informative and interesting article, thank you for sharing. I will admit that being only 20 I have absolutely no idea what I’m doing when it comes to taxes. It amazes me that in high school and even college, taxes is a topic that rarely surfaces. Most of my elders that I have questioned on the topic do not have a clue.

    One last final thought, it is very humbling to see that people in the less than 20,000 bracket have such a high percentage of contributions, I guess there still is some hope for humanity.

  14. Be mindful about donating a car. One may think it’s worth Kelly Blue Book, or whatever, but one can only deduct the price (net of refurbishment) the charity gets for it. Plus the charity is at least as interested in unloading the car quickly as in getting the best price. Far better to sell the car oneself and donate the proceeds if one is really charitably minded.

  15. I always have tax on the brain this time of year. I’m thinking a lot about my 2014 deductions since my income for next year is totally up in the air. I will probably try to claim as many deductions as I can this year since my income could be lower next year if it takes me a while to find a new job.

  16. I’ve been at it for days and am nowhere near finishing!

    Sam, you’ve made the point elsewhere in your blog that using tax software simulations to feed a spreadsheet greatly helps in making decisions that maximize future net worth. This process has kept me from converting to Roth (with a 5% investment growth rate and 20% average future tax rate, breakeven in 2047!), kept me from realizing tax deferred investments to retain zero tax for dividends / capital gains (maximum of $14,115 MFJ tax savings, standard deduction), and to even ALSO possibly pick up an Obamacare subsidy ($12,483 MFJ tax savings + $10,092 ACA tax credit) to potentially save $22,575 annually! (I say potentially because I just can’t believe that making a MAGI just one dollar over 400% of the FPL – $62,920 for two – actually makes the entire subsidy go away. I am planning to simulate with 2014 TurboTax when it is available next week.)

    One simply can’t pay someone else to simulate one’s long term financial situation. One would pay LOTS of money to have cookie cutter, litigation-resistant answers that “could” work for a “typical” person who actually doesn’t exist outside of their hypothetical.

    1. For sure. Running different financial situations is the main reason why I’ve done my own taxes for 12 years in a row. While I was working, I did them to understand the ever changing tax system as best as I could.

      Now that I’ve got different types of income, running different financial scenarios is even more useful. I use H&R Block Premium, but TurboTax is just as excellent. I don’t want to switch b/c my last year’s data just gets pulled into the latest year.

  17. You mention that “It’s not a surprise that people are more willing and able to make charitable contributions as their income increases” but both the table and the graph show low income give more to charity as a percentage of AGI than other income levels (except 10m in figure) with 0 to 20000 at the highest percentage of all. I thought this was pretty heartening to see as the guys below 20k are probably be exempt from federal income taxes and still give the most.

    1. Excellent observation. I’m hypothesizing that at the 20K and under level, it’s much more about giving and sharing to survive. They know, see, and feel the people they are trying to help the most.

      1. I’d rather not think it was mostly tithing to enable socializing, spirituality (free therapy), and ultimate salvation.

  18. We made too much money this year and I had to increase our federal and state withholdings in order to not be penalized by the end of the year. Therefore, I had an extra $1,000 taken out of my paycheck for federal taxes and $400 for state for each pay period through the end of the year. We contacted our accountant and she recommended doing this because I didn’t pay enough taxes through the year. Next year I will adjust my withholdings. It sucks to pay so much in taxes, but at the same time, I made more money this year than I have in the past. Gotta take the bad with the good, right?

    I work on commission though and do not anticipate making this much next year, so we will see what happens three quarters of the way through 2015.

    1. My biggest curiosity is this “Safe Harbor” tax rule. The IRS says that if you pay at least 100-110% of what you paid last year, you’re “safer” than if you don’t. But, what if your business/income goes down 50% the next year?

      In other words, the government always wants its money, and wants more of it every single year, no matter how bad you do. The government is smart, and once people realize this, they will get super educated on understanding as much about taxes as possible.

      I’m against Roth IRA contributions due to this principle.

      Disadvantages of a Roth IRA: Not All Is What It Seems (Hard stance)

      The Only Reasons To Ever Contribute To A Roth IRA (softened stance to see other people’s points of view)

      1. This is true. But apparently, I wasn’t even close to paying 100% of what we paid last year, hence the extra contributions. I am going to have to read up on what you wrote about Roth IRA’s since we do typically contribute. We may have made too much this year though. I won’t know until the end of the year.

    1. This is very intriguing and something I’m going to consider doing. If you’ve done it yourself before, was it difficult? My next payment is scheduled on auto pay the first week of January, so I’d have to contact my bank I guess to try and do a one time override to pay it in December. Could be a bit of a pain to do that and then get it put back on a revised schedule the first week of Feb, but I would like that extra interest deduction this year.

      Are there any other ways you know of to get more mortgage interest deduction this year on an existing mortgage? Thanks

      1. It’s interesting. On the one hand, you pay down one more month of principal, which means less future interest payment and deduction. On the other hand, if you register to pay another monthly PMI payment, you’re also paying extra interest to deduct to that year’s income if you move January’s payment forward.

        The confusion lies in the amount of payment because I’ve made multiple extra principal payments this year. I guess that’s the answer. All my extra principal payments were to principal, and not to interest. If I were willing to pay extra interest, then I would get the extra deduction, but that is paying extra interest, which doesn’t make sense.

        1. It’s not paying extra interest. It is simply paying the interest that was due jan 1 on dec 31st. Then the February payment is due on schedule. It is pretty simple to change the date of one autopay mortgage payment and increases the interest deduction for the year.
          This is different than prepaying principal which would be making an ‘extra’ payment. This approach is making the payment early NOT making an extra payment

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