Maximize Last Year's Tax Savings with these 5 Tips

As the calendar turns, it’s easy to feel like your tax-saving opportunities have come to an end. However, not all savvy financial planning adheres to the same deadline. There are numerous tax saving strategies you can implement after the year has concluded. In this blog, we’ll explore some effective methods to minimize last year’s tax burden.

1. Contribute to Pre-tax Retirement Savings Accounts:

One of the most effective ways to reduce your taxable income is by contributing to retirement accounts. For instance, you can make contributions to your Traditional IRA or SEP IRA until the April tax filing deadline. These contributions may be fully or partially tax-deductible, providing an immediate reduction in your taxable income. Check with your CPA to see how much you should be contributing.

2. Health Savings Account (HSA) Contributions:

If you have a High Deductible Health Plan (HDHP), contributing to a Health Savings Account (HSA) can offer both short-term and long-term benefits. Contributions made to your HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. Even if you missed maxing out by year-end, you can make contributions until the April tax deadline.

3. Bunching Charitable Gifting:

Did you forget to write out a check for your favorite charity before year-end? I’m guilty as charged. While you can’t turn back time for it to apply to the prior tax year, you can double your efforts in the current year, making it more likely that you’ll get the taxable benefit for doing so in the current year. With the standard deduction being historically high, most people can’t itemize charitable donations to get tax benefits (for example, gifts ranging from $100 – $10,000 usually don’t help people beat the standard deduction). By bunching years worth of donations into a single year, you’re much more likely to exceed the standard deduction and be able to itemize to reduce your taxable income. If you’re in a position to give one big gift vs small annual ones, this is certainly something to consider. And if you can make a sizable donation by bunching a few years together, but want to sprinkle it to one or more charities over the years to come, you could open a Donor Advised Fund (DAF). In the year of the transfer to the DAF, you’ll aim to gift a large enough sum to itemize the donation. From there you can sprinkle your gifts to multiple charities over multiple years. At the time of the various gifts to charity, you wouldn’t report the donations for tax purposes as you got the deduction upfront.

4. Remember to pay the final estimated tax payment to avoid/reduce interest and penalties:

January 15th marks the final estimated tax payment for the prior year. If you think you’ll owe taxes for income that did not have any withholdings taken on it, this is your signal to make estimated tax payments. Those with W-2 earnings have automatic withholdings, but others earn their income from self-employment, rent, royalties, and investment income which require the taxpayer to manually pay the IRS their fair share of taxes since it’s not automatically withheld. And the reality is, the IRS wants their cut at the same time the taxpayer receives theirs. That’s why they came up with estimated tax payments which have 4 deadlines throughout the year. The last being January 15th.? That said, the first two weeks of the new year is your opportunity to make a payment to reduce or avoid interest and penalties against any anticipated taxes due. Myself or your CPA can help determine if you should make estimated payments, or if you meet safe harbor requirements.

5. Payout Trust and Estate Income:

If you happen to be in control of an income-producing estate or irrevocable trust, you’re likely aware that the income tax assessed against an estate or irrevocable trust is much less favorable compared to typical tax rates and brackets. For this reason, it’s often recommended that income be pushed out to the beneficiaries so it can be taxed at their more favorable rates. If you didn’t do this throughout the tax year, it’s ok! You have 65 days after the new year to push out income from the year prior. So January and February is the time to decide if it’s a moot point or decent tax savings to disburse income.

If now is the right time to get your financial house in order, schedule a free consultation.