Filing income taxes and experiencing an unexpected negative outcome can be a very bad life event. As we approach the end of the year and draw nearer to income tax season many people may grow weary, and it gets so bad for some that they will not even file their taxes. This is not a good idea, as it could turn a bad situation into a horrible situation. Being prepared is the best option. Tax Planning should begin towards the end of the preceding tax year, not towards the end of the tax year or during tax season. Yet if you did not choose this path, there are still last-minute tax moves that you could make to avoid that sudden heavy burden.
Contributing to an Individual Retirement Account during the tax year or in the following year all the way up until the tax filing deadline (not including extensions), could create a deduction for you, a taxpayer and their spouse, if married and is not covered by a retirement plan by their employer. For 2019 the maximum contribution to an IRA is $6,000, if over 50 years old an additional $1,000 can be contributed. It is possible that the full amount of the contribution could be deductible, which in turn is a significant tax saving. For example, if you were in a 24% marginal tax bracket for 2018 and you contributed $5,500 to an IRA, then you could save up to $1,320 in tax liability.
Donate to Charity
Although the standard deduction has increased for taxpayers, many still supersede the standard deduction because they pay high amount in sales taxes, mortgage interest, or had costly medical expenses. In these cases, in which a taxpayer will itemize their deductions, contributing additional funds or tangible items to a charitable organization will allow you to take more of a deduction from your AGI (Adjusted Gross Income) to arrive at taxable income. A lower taxable income equals a lower tax liability.
Expedite Medical and Dental Procedures
As discussed above in regard to charitable contributions when other items that go into the equation of itemized deductions are significant enough, then medical and dental expenses could put you in a situation where you itemize rather than taking the standard deduction, or simply increase the amount of your itemized deductions. For this reason, if you are planning to have a medical or dental procedure it might be in your best interest to go ahead and have the procedure done before the end of the tax year. The portion of your medical and dental expenses that exceed 7.5% of your adjusted gross income, will be included as additional amount to your itemized deductions. Here is an example of how this works. If your AGI is $50,000 and you paid $10,000 in medical and dental expenses, then you will qualify for a deduction in the amount of $6,250 ($10,000 – (0.075 x $50,000). Simply having the procedure done does not qualify you to claim the expenses, but the amounts that you paid for the procedure is what will be deductible during the tax year.
I you know that you are going to owe taxes and you also have not paid at least 90% of your taxes throughout the year, then you may owe taxes and penalties as well. In a situation like this a taxpayer may be required to make estimated tax payments (Quarterly Tax Payments). Normally estimated tax payments are made to the IRS for each quarter of the tax year (Q1-April 15, Q2-June 15 , Q3-September 16, Q4-January 15 of the following year) but they can be made at any time as the IRS is always willing to accept your money. That being said, if you are a late bloomer you can still make multiple estimated payments if needed before Tax Day. For example, if you believe you are going to owe $5,000 in taxes, you could make five payments of $1,000 if you start in September of the current tax year and make the last payment by January 15 of the following year. This would help you avoid having to Pay the entire $5,000 on Tax Day by spreading it out and making it easier on yourself.
Sell investments at a loss
If you know you are going to owe taxes and you have capital investments such as stocks, then you might consider selling off some stocks that are not performing well. The investments would have to be sold at a price less than what you paid for them, but once you have sold these investments at a loss, they will offset any taxable gains that have been realized during the year. This tactic will lessen the amount of tax you have due to capital gains. If the realized losses succeed the realized gains, then up to $3,000 in excess capital losses can be used to offset ordinary income. Any amount over $3,000 will carryforward to future tax years.
This strategy works best for those who are self-employed. For people who are employees and receive wages or salary income it may be a little tougher to do this. In normal circumstances an employee is not able to defer income to the next year, but if they are due to receive bonus pay at the end of the year, then it may be possible to hold off the bonus pay until the following year. Self-employed people have more control over when they receive payments. A sole proprietor can control their own schedule; therefore they can put off completing work until a later date which will insure that payment will come at a later date. They also can simply invoice a client late enough during the year or make terms that will make sure that the payment will not be received until the next year. Using this strategy makes it important to change your habits and become a person who plans early for tax season, because while this approach can save you present tax dollars, you will be increasing your income for the upcoming tax year. You will need to have already started putting together a solution for this and not waiting until the last minute.
This can be used to reduce the net income of your business. Also, the new tax code allows businesses to immediately expense the cost of “section 179 property” in full up to $1,000. As a business owner hopefully, you are trying to save money and cut cost in order to be more profitable and grow your business. In this special situation though it might be necessary to go ahead and spend money on things that you may have wanted for your business, but just have not made the top priority list. If these purchases are made before the end of the year, then those expenses up to $1000 can be expensed, these expenses can include machinery purchases for business use, computers, office furniture, office equipment, tangible personal property used in business, and other similar things. Expensing such items could save a business owner a ton in taxes.
Planning ahead for tax season is the best way to achieve tax savings, but if for some reason you are in a situation where you need to make something happen at the last minute, then one of the above mentioned tactics could be for you. As a taxpayer identifying what move to make could be challenging so as I always advise, it is best to meet with a Molen & Associates Tax Professional to get an income tax estimate and before pulling the trigger on any of these ideas.
Tax Advisor & Accountant