Though our firm specializes in helping people resolve their IRS or State back tax problems, we also love saving money. After all, one of the best ways to avoid getting into tax trouble is to have a solid tax strategy to minimize your liabilities.
The end of the year is the perfect time to review your finances, and the perfect time to make some smart tax saving moves. Making the right moves at the end of the year can reduce your tax liability and allow you to keep more of what you earn.
From harvesting your capital losses to boosting the amount you put away for retirement, there are things you can do to lower your tax burden. You may not be able to control the tax fight in Washington, but you can limit the amount you pay by assessing your own tax situation and making some prudent changes.
Boost Your 401(k) Contributions
As the year ticks down to its close, it pays to look at your most recent pay stub and see how much you have already contributed to your 401(k) plan. Contributing to a 401(k) plan is an excellent way to save on taxes, since every dollar you put in is deducted from your taxable income.
For 2018, you can contribute up to $18,500 to your 401(k) plan, plus an extra 6,000 if you are 50 or older. If you have not yet maxed out your 401(k), now is the perfect time to boost your contributions and make up for lost time. Many companies allow you to change your contribution percentage any time you wish, so boosting the amount you put in between now and the end of the year can make a huge difference. You can adjust your contribution downward in the new year if you wish, but at least consider leaving it at its new elevated level.
Gather Your Donations
Donating to charity makes you feel good, but it can also be good for your wallet. If you itemize your deductions, you can take a deduction for not only cash contributions but gifts of household goods and clothing as well.
Take a few minutes this weekend to go through your closets and storage areas. Look for usable items you no longer need, box them up and take them down to your local thrift store or other charity. Be sure to get a receipt that shows what you donated, along with the approximate value. Keep those receipts in a safe place and use them to lower your taxes when you complete your return.
Rebalance Your Portfolio
No matter what you invest in, it is important to review your portfolio at least once a year. That annual review gives you a chance to see how your investments have done, but it allow allows you to rebalance your mix of stocks, bonds and other holdings.
Start by gathering your most recent brokerage and mutual fund statements, then add up your holdings in the applicable categories, like stocks, bonds and cash. Compare the percentages to your ideal portfolio, then make any adjustments needed to bring things back into balance. This exercise can keep your investment strategy on track, but it can also help you lower your taxes.
Harvest Your Losses
When you make an investment, you expect to realize a profit, but things do not always work out that way. If one of more of your investments has been a disappointment, the end of the year is the perfect time to cut your losses and use them to lower your taxes.
If you have a loss in a stock, mutual fund or other investment, you can use that loss to offset any capital gains you have elsewhere. If the amount of your losses exceeds your gains, you can write off up to $3,000 against your taxable income. That could make a big difference in how much you pay, so go through your stock portfolio and look for any underperforming stocks you want to get rid of.
Taking some time at the end of the year can lower your tax burden substantially while helping you plan more effectively for the future. For instance, retaining that higher level of 401(k) contributions can lower your taxes now, and next year as well. Getting rid of those loser stocks and harvesting your losses can make your portfolio stronger in the new year and get you off to a great start in your investment portfolio. The time you spend making those last minute tax moves just may be the most profitable time you will spend all year.