Once you’ve reached the last month of the tax year, your options are limited to minimize your income taxes. But there are a few things that could still be done, so don’t give up hope.
For example, you could double up your real estate taxes by prepaying next year’s tax during December. Doing this with, for example, a $3,000 per year real estate tax bill could result in a reduction of tax for the year of $750 if you’re in the 25% bracket. Keep in mind though, that you’ll have forked out this money long before it is actually due in most cases, and for the next year you won’t have this deduction available if you used it in this year.
The same could be done with your charitable contributions - there’s no reason that you can’t make additional contributions to your favorite charities at the end of this year instead of waiting until next year.
You could also send your final estimated state income tax payment due in January of next year during December and claim that payment on this year’s itemized deductions as well.
Prepaying your January mortgage payment will credit that mortgage interest to this year as well, further increasing your itemized deductions.
Other itemized deductions could be “stacked” in one year, such as medical expenses (subject to the 7.5% floor) and miscellaneous deductions (subject to the 2% floor).
It’s important to keep in mind that the moves that you make this year might reduce your tax now - but you might have an adverse impact on next year’s income tax by doing so. It will pay to run the calculations based on what you know about this year’s tax and next year’s tax to make sure that it is in your best interest to do this.
Here’s how it might play out: if you prepaid your next year’s real estate tax during this year, it might reduce your deductions below the Standard Deduction - which could be a good thing. In doing this, you would get to use the Standard Deduction to increase your tax deductions on next year’s return when you specifically reduced your deductions for that year by prepaying the deductible real estate tax in during this year. In this fashion you might be making the most of the standard deduction and your itemized deductions year after year - one year using the “stacked” deductions, the next using the standard deduction.
These prepayment options could have a negative affect if you are subject to the Alternative Minimum Tax (AMT). Prepaying your state tax, mortgage interest and some medical expenses might trigger or cause an increase in AMT. One tactic that you might consider is selling a taxable investment that has an inherent loss; this is especially useful if you’ve sold another investment at some point in the tax year that has resulted in a taxable gain. Losses can be used to offset those capital gains dollar for dollar, and an additional $3,000 in capital losses can be used to reduce your ordinary income as well.
You can also make up for underpayment of estimated tax by taking a withdrawal from an IRA (especially if you’re over age 59½) and having tax withheld from the withdrawal. This can also be accomplished by having more tax withheld from your paycheck if you’re still working, by filing a new W4. Another significant move you can make includes the Qualified Charitable Distribution from your IRA, 401(k) or 403(b) - allowing you to bypass recognizing that income, including your RMD. This can only be done if you’re at least age 70½ and subject to Required Minimum Distributions. The charity receives a contribution, and you get to lower your year-end balance in your account, therefore reducing your RMD for next year. For more details on this, you should check out the IRA Owner's Manual.
You can also delay your first RMD (if you reached age 70½ this year) until as late as April 1 of next year, although that will mean you have to take two RMDs next year. But in some circumstances that may be the better option.
You can also make a deductible contribution to your IRA, if you qualify - but you don’t have to do that before the end of the year, you have until April 15 to do that.
This isn’t an exhaustive list of year-end tax moves, just several of the more prominent ones. Hopefully you’ll find what you need here to help with your year-end tax plans.
- real estate tax