As the year draws to a close, it’s time to focus on tax strategies that can help reduce your liability and maximize your savings. Whether you’re an entrepreneur, freelancer, or a salaried professional, proactive tax planning before December 31 can set you up for financial success. Here are actionable steps to consider:
1. Maximize Retirement Contributions
Contributing to retirement accounts is one of the most effective ways to reduce taxable income.
- For Employees:
- Contribute the maximum to your 401(k) (2023 limit: $22,500, or $30,000 if you’re over 50).
- Check if your employer matches contributions and take full advantage.
- For Entrepreneurs & Freelancers:
- Contribute to a SEP IRA, Solo 401(k), or SIMPLE IRA.
- These accounts often allow higher contribution limits, which can significantly reduce taxable income.
2. Harvest Investment Losses
Offset capital gains by selling underperforming investments in a process known as tax-loss harvesting.
- If you’ve made gains in stocks or other investments, selling some at a loss can balance the gains and lower your overall tax burden.
- You can deduct up to $3,000 of investment losses annually against your ordinary income.
3. Defer Income
Delay income to the following year to avoid being pushed into a higher tax bracket.
- Entrepreneurs and freelancers can defer invoices or client payments until January.
- If your income is expected to be lower next year, deferring income can result in overall tax savings.
4. Invest in Your Business
Year-end purchases can reduce taxable income for entrepreneurs and small business owners.
- Section 179 Deduction: Deduct the full cost of equipment, software, or machinery purchased and put into use before December 31.
- Advertising & Marketing: Boost future growth while taking advantage of deductions.
- Education: Invest in courses or certifications to improve your skills—these expenses are often deductible.
5. Donate to Charity
Generous giving can result in significant tax benefits.
- Donate cash, goods, or appreciated assets (like stocks).
- Ensure the organization is a qualified 501(c)(3) to claim deductions.
- Keep records of all donations, and for larger amounts, get a receipt or appraisal.
6. Fund a Health Savings Account (HSA)
If you have a high-deductible health plan (HDHP), contributing to an HSA is a triple-win: pre-tax contributions, tax-free growth, and tax-free withdrawals for medical expenses.
- The 2023 contribution limit is $3,850 for individuals and $7,750 for families, with an additional $1,000 catch-up for those 55 or older.
- Contributions must be made by December 31 to count for this tax year.
7. Review Your Withholding and Estimated Taxes
Avoid penalties by ensuring you’ve paid enough in taxes throughout the year.
- Employees: Use the IRS Tax Withholding Estimator to adjust your W-4 if necessary.
- Entrepreneurs & Freelancers: Check if your quarterly estimated payments cover at least 90% of your current-year tax liability.
8. Take Advantage of Last-Minute Tax Credits
Credits directly reduce the taxes you owe, so make sure you qualify for:
- Child Tax Credit: For families with children under 17.
- Education Credits: Such as the American Opportunity Credit or Lifetime Learning Credit.
- Energy Efficiency Credits: For installing solar panels, energy-efficient windows, or appliances in your home.
9. Organize and Document Expenses
Proper documentation now saves headaches later.
- Review all business expenses and ensure you have receipts or proof of purchase.
- Categorize expenses like travel, meals, office supplies, and software subscriptions.
- Consider using accounting software like QuickBooks or Wave to streamline this process.
10. Consult a Tax Professional
Tax laws are complex, and missing deductions or credits could cost you.
- Schedule a year-end consultation with a CPA or tax advisor.
- Discuss any major life changes (marriage, divorce, a new child, or job change) that might impact your taxes.
Key Statistics & Trends to Keep in Mind
- According to the IRS, the average taxpayer leaves $1,000 in deductions on the table every year simply due to lack of planning.
- Tax reform updates often include incentives for small businesses and entrepreneurs—staying informed can significantly impact your savings.
- A 2023 survey by QuickBooks found that 65% of small business owners wait until the last minute to organize taxes, leading to missed deductions.
Take Action Now
By making these year-end tax moves, you can minimize your tax liability and maximize your financial health heading into 2025. Start planning today to avoid the stress of last-minute decisions and position yourself for a strong financial future.
What’s your top tax move this year? Share in the comments below!
Hello! My name is Nia Patrick and I hold an MBA in Financial Management and a Bachelor of Business Administration. I teach you how to build and operate an online business.