12 Tax Things to do Before 12/31 [Video]

by Stephen Smalenberger, EA / October 25, 2021

Here are 12 Tax Things to do before 12/31.  As we approach the end of the year what should you be thinking about?  This is the second most common time people start to think about their finances.  It could be because you are spending more money due to Christmas shopping. So you pay attention to how much is available to spend.  It could also be that the year is mostly behind you so now you know what total income and deductible items are.  Here is a helpful list to guide you through year-end, tax efficiently.  

The list of 12 Tax Things to do before 12/31:

Income Tax Planning Items:

  1. Tax Analysis- This one is key.  Get an understanding of what your tax return is going to look like before you actually file it.  This means working with your accountant or CPA. Maybe it’s even putting something in Turbo tax yourself, so there are no surprises or “sticker shock” when you actually file your return.  Each of the following items will impact what you do so knowing where you stand currently and whether or not you should do any of these other 11 items will be really helpful.
  1. Adjust Tax Withholding- After you have put that analysis together you will know if you are on track or behind on your withholdings or quarterly payments. You can still make a final quarterly estimated tax payment if you need to, to avoid any underpayment penalty.  We discuss how to avoid these underpayment penalties.  Or you may consider making adjustments to begin the new year by adjusting your withholdings from your paycheck. 
  1. 401(k) & Employer Match-  Look at any benefits your employer is offering.  If you haven’t contributed enough yet to your 401(k) it might make sense to start. Or you can at least get to a point where you meet the company match.  You don’t want to leave free money on the table.

Retirement Planning Items:

  1. IRA’s- This is both traditional and Roth IRA’s.  Maybe you need to put some into the traditional or some into the Roth IRA.  You could also put a combination of the two until you reach your full amount.  If you are budgeting it’s probably easier to do this all year.  But this is one you actually have until April 15th after year-end.  You don’t have to make a contribution by 12/31, but if you are budgeting and like to stay on track then doing it before year-end is great.
  1. Roth conversions- This is where you are taking a pre-tax account like a traditional IRA and transferring these assets or investments to a tax-free Roth IRA.  It’s called a conversion.   You have up until 12/31 of each year to accomplish this.
  1. Gains and Loss harvesting- This involves looking at your investments in your taxable account. What have you sold at gains this year and do you have anything you can sell at losses to offset those?  Otherwise if you’re in a really low tax bracket, take advantage of the zero tax for capital gain/loss harvesting.  You may even want to sell things at gains on purpose to fill up some of the lower brackets that could be taxed at a zero tax rate. 
  1. RMDs (Required Minimum Distribution)– If you are in your retirement years meaning you are 70 ½  plus or 72 years old with the new rule you have to start taking money out of those IRA accounts.  If you are no longer working this includes your 401(k).  If you are still working you can wait to take the 401(k) RMD. This is money that has to come out of these pre-tax accounts by the end of the year.  Don’t get overwhelmed that this is just one of the 12 tax things to do before 12/31.
  1. Charitable– This is one area it is really easy to get behind on supporting the charities and organizations that you appreciate.  Look at what you have given year to date. Are you behind? Do you want to catch up?  Many organizations can use your support.  This can be in the form of cash, a check, non-cash (household items, clothing) donations to goodwill or salvation army, or even with appreciated stock.  

If you have investments that have really appreciated over the years you can give those in a really tax efficient way. It can even come from your IRA’s.  If you are 72 and you are starting to take those RMD’s you can do that directly from your IRA and send that to charity.  Those are called qualified charitable distributions

Employee Benefits & Giving-Related Items

  1. HSA’s– These are Health Savings Accounts. These accounts you put money into are specifically for medical expenses. You can do this through your employer which is the preferred way as it reduces your payroll taxes.  Or you can contribute personally with a check. This is one where you have until the end of the year, through payroll, or you have until April 15th of the following year if you are contributing funds by check on your own.  
  1. FSA– A Flex Spending account is another medically related account.  This one is known commonly as use-it-or-lose-it.  You deposit money in and have until the end of the year to use it or it’s gone.  There are a few types of plans that allow $500 to be rolled to the next year or there is a grace period, but essentially you need to use it or you’ll lose it.  Maybe you have some medical procedures you are planning for early next year and if you have met your deductible you could get it done now while you have FSA funds to use. 
  1. Gifting– If you want to help a family member or a friend you can give up to $16,000 a year per person without any tax implications.  As long as you stay under the $16,000 per person per year there is no gift tax requirement you have to file.
  1. 529’s– Whether you are a parent or a grandparent you may want to start setting up some education funds.  Here in Illinois and some certain other states you can contribute funds and also receive a state tax benefit.  It doesn’t have any effect on federal tax and each state has some different thresholds that have to be met.  But you could be allowed to take a state deduction with this contribution too.   

Reach out if you need help!

So those are the 12 tax things to do before 12/31.  See which ones apply to you or make sense given your current situation.  Maybe others are not for this year but other years ahead.  We can put together a tax analysis so you know which of these would really impact you.  It’s never too late to get started either.  Even starting a new year ahead you can make changes!  If you have any other questions we are always happy to help!

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Stephen Smalenberger, EA

Steve enjoys getting to know clients and hear their unique stories and the lessons learned which has brought them where they are today. One of the reasons he enjoys what he does is the ability to show the outcome that can be achieved with different choices. He also enjoys continually learning.