Year-End Tax Planning Steps for Individuals

As the calendar year draws to a close, financial tasks can be easy to postpone. Yet this is an important opportunity to look at your tax picture, because some planning choices may no longer be available once the new year begins.

Tax filing season may still be ahead, but a little proactive tax planning now can reduce last-minute pressure, limit the risk of an unexpected balance due, and help you use available tax-saving opportunities. Whether your income, family, investments, or employment changed during the year, a review can help you move into the new year better prepared.

Check Tax Withholding and Estimated Payments

Your paycheck withholding should reflect your current circumstances, but life and income can change during the year. A new position, pay increase, retirement, investment earnings, self-employment income, or changes in your household may affect your overall tax obligation.

When too little is withheld from wages, you could face a balance due when you file. On the other hand, excessive withholding means more of your money has been paid in throughout the year than may have been necessary.

If you receive income without automatic withholding, including earnings from self-employment, rental activity, investments, or retirement accounts, review your quarterly estimated taxes as well. An insufficient payment can result in a tax bill and possible penalties. A year-end review can help determine whether an additional payment is appropriate before December 31 or before the final estimated-tax due date.

Consider Remaining Retirement Contributions

Year-end is also an appropriate time to evaluate retirement savings. Contributions to workplace plans such as 401(k) and 403(b) accounts generally need to be made through payroll deductions before the year ends.

Increasing contributions during your remaining pay periods may reduce taxable income while also adding to your retirement savings. It is also worthwhile to confirm that you are contributing enough to receive any employer matching funds available to you.

A Roth conversion strategy may also deserve consideration for some taxpayers. Converting funds to a Roth IRA generally creates taxable income for the year of conversion, but qualified Roth IRA withdrawals may be tax-free in the future. Because the outcome depends on your full financial and retirement tax planning picture, this decision should be evaluated carefully.

Review HSA and FSA Opportunities

If you are enrolled in a qualifying high-deductible health plan, a Health Savings Account may offer meaningful tax advantages. Eligible contributions can be deductible, account earnings may grow tax-deferred, and withdrawals for qualified medical expenses are generally tax-free.

If you have not yet reached the applicable contribution limit, you may still have an opportunity to contribute additional funds before the deadline.

Review your Flexible Spending Account balance, too. Many FSA plans follow use-it-or-lose-it provisions, which means unspent funds can be forfeited after the plan’s allowed period ends. Since employer plan rules differ, checking your balance now may help you avoid losing funds. Open enrollment can also be a useful time to decide whether your FSA election continues to match your family’s needs.

Evaluate Investments and Income Timing

When investments have declined in value, tax-loss harvesting may be worth reviewing. Selling an investment at a loss can potentially offset capital gains, and excess losses may sometimes offset a limited amount of ordinary income.

Before selling for tax purposes, consider your long-term investment plan and the IRS wash-sale rules. Those rules can reduce or eliminate the expected tax benefit when substantially similar investments are repurchased too quickly.

It may also be helpful to examine the timing of income and deductible expenses. Depending on your individual circumstances, accelerating certain deductions or postponing income until the following year may be beneficial. In other situations, accelerating income or delaying deductions may make more sense. The best approach depends on your personal tax situation.

Plan Charitable Contributions Carefully

Many individuals make charitable gifts before year-end, and thoughtful planning may improve the potential tax value of those contributions.

Keep receipts and written acknowledgments for every gift you make. Depending on your circumstances, donating appreciated securities rather than cash may be worth exploring. Taxpayers who itemize deductions may also consider concentrating several years of charitable gifts into one year.

To count on the current year’s return, charitable contributions must be completed before the end of the year. Be sure to allow enough time for the donation to be processed and documented.

Complete Required Minimum Distributions

If you are subject to required minimum distributions, confirm that your RMD planning is complete before year-end. Missing a required distribution can lead to penalties, making this a key item for retirees to address.

If charitable giving is part of your plan, a qualified charitable distribution may be an option. Eligible IRA owners may make gifts directly from an IRA to qualifying charities. This can satisfy all or part of an RMD while potentially providing favorable tax treatment.

Prepare Records Before Filing Season Begins

If you are saving for education through a 529 plan, year-end is a good point to review contributions. Certain states provide tax benefits for qualifying deposits, and even modest additions can build education savings over time.

It is also helpful to start organizing tax records before January arrives. Gather charitable-gift receipts, mortgage interest statements, property-tax documentation, investment records, childcare expense information, self-employment income records, and medical expense documents. Being organized early can make individual tax preparation more manageable and may help prevent overlooked deductions or credits.

The final weeks of the year can pass quickly, and many year-end tax planning opportunities expire when the calendar changes. Reviewing withholding, retirement contributions, health accounts, investments, charitable gifts, required distributions, education savings, and tax records can make filing season smoother and help reduce surprises.

Thomas Tax Solutions LLC helps individuals in Wilmington, North Carolina and beyond take a proactive approach to year-round tax planning. If you would like help reviewing your year-end tax situation, our team can help you understand the options that may still be available before the year closes.