Many people don't even think about their taxes until March. But there are good reasons not to wait until the deadline looms in the near future. As the end of the year approaches, there might be some things you can do to reduce the burden you will have when you files your taxes.
Here are a few ideas:
- If you have realized a large capital gain, you might consider offsetting that gain by selling an investment that has fallen in value. You can also apply another $3,000 in losses against ordinary income and additional losses can be carried over to subsequent years. (Note that it's dangerous to make investment decisions solely based on tax consequences, but if you're thinking about selling a losing investment, this might be an additional incentive.)
- Check your mutual fund distribution date. If the mutual fund is down for the year, you can avoid paying taxes on the large dividends and distributions. If you sell the mutual fund before the distribution date, you can avoid paying those taxes.
- Increase your contributions to retirement accounts such as a 401(k) account. If you have not contributed the maximum amount, employers will let you make changes on specific dates during the year, and contributions must be made no more than 15 days after the end of the month for a specific contribution.
- If you have many years ahead of you until you start making withdrawals from your IRA, consider converting it into a Roth IRA, which will enable you to make tax-free withdrawals. However, you must take into account that contributions are not tax-deductible. Conversions also work if you want to pass on money to your heirs, since there are no mandatory withdrawals and your heirs will not have to pay taxes .
- Take last-minute deductions.
- If you received a big refund the previous year, you might want to adjust your withholding. While you might like getting a refund, it actually hurts you, because it means that too much tax was withheld throughout the year. If that's the case, you were giving the government an interest-free loan. If you received a large refund, talk to your employer about reducing your withholding amount.
- If your company provides flexible spending accounts, sign up before the end of the year. The money is deducted from your paycheck on a pre-tax basis to cover expenses such as healthcare not covered by your insurance.
- If you have control of your salary pay date, you can ask your employer to defer your payment until January, in effect deferring the tax impact for a year. However, this only makes sense if your tax bracket for the following year will be lower or will stay the same.