Sharing is caring! Tax can be complicated pretty quickly. But it doesn’t have to be if you are using the right tax planning strategies. It allows you to make better financial and tax decisions by making the most out of your money. Let’s go over the tax planning definition before looking into the tax strategies. What Is Tax Planning? Tax planning can be summarized in one simple sentence. Make the most out of your financial situation by lowering your taxable income as much as possible. It doesn’t mean that you have to do shady things to do that. Think about the IRS as your business partner that you need to pay whenever you make a profit. The less profit you make, the less you need to share. A lot of incentives are offered by the IRS for you to pay fewer taxes. You just have to know them and take action! 11 Year End Tax Planning Strategies To Reduce Your Taxable Income What Is a Year End Tax Planning Strategy? First thing first, a year end tax planning strategy is an action that you take to make the most out of your money. There are three ways it can help you. Reducing your taxable incomeUsing money that otherwise would be lost Avoiding penalty fees Most of these strategies need to be executed before December 31st. 1 – Determine Your Tax Deduction Category Standard vs. Itemized You can take advantage of the standard tax deduction without having to do anything special. Per the IRS, In 2021, this tax deduction was $12,550 for a single person and $25,100 for a married couple. The itemized tax deduction is a bit more complicated than the standard deduction. You have to keep track of many documents and do a few calculations. The most popular itemized deductions are state and local taxes, home mortgage interests, and charitable contributions. Just keep in mind that the state and local taxes have a cap of $10,000 per year. 2 – Year End Tax Loss Harvesting Strategy You can take advantage of the tax-loss harvesting strategy for your losing investments. This strategy allows you to offset your capital gains by selling your losing assets. For example, if you sell some investments for a $5,000 gain and sell other assets for a $4,000 loss, your capital gains will only be $1,000. So, instead of paying taxes on $5,000, you will pay taxes on only the $1,000. However, you have to sell your losses before the end of the year to take advantage of this strategy. If your losses exceed your gains, you can deduct up to $3,000 from your income. However, if it exceeds $3,000, the remaining losses will be passed to the next tax year. 3 – Maximize Your Retirement Contributions Maximize your retirement contributions in a 401(k) or IRA. It can help you save money for your future and reduce your taxable income immediately. In 2021, the contribution limit for 401(k) plans was $19,500 and $6,000 for IRAs. So if you haven’t reached the limit yet, increase your contributions for the rest of the year. 4 – Contribute To Your FSA If you contributed to your FSA (Flexible Spending Account) all year long, now is a great time to assess what you can do. FSAs allow you to carry over up to $500 to the following year. So, if your remaining balance is higher than $500, it is time to catch up on your medical visits. Because you will lose this money if you don’t. For example, you could make a primary care appointment, get physical therapy sessions, or call your dentist and optometrist until your account shows a below or a $500 balance. 5 – Do Not Forget About Retirement Account Minimum Distributions Take a moment to log into your retirement account and check how much your yearly required minimum distributions are. It is your last chance to avoid paying a 50% penalty, so it is time to transfer the money to your bank account. This penalty applies to you if you inherited a retirement account or are more than 70.5. 6 – End Of Year Tax Assets Protection It is essential to have a plan for different life scenarios, even if we know how hard it is to think about them. However, it will allow you and your family to avoid making financial mistakes. First, make sure your beneficiary designations to be up to date on all your financial accounts. If they are not, the court will follow your state laws to determine the allocation of your financial assets. Another thing you can do is to have a financial plan in case something happens to any of your family members. Talk to your attorney to know about all the possibilities available in your state. 7– Year End Tax Protection With IRS PIN Identity theft is common during tax season, and it is the last thing you want to have in mind when filing your taxes. The most common tax fraud is for someone to file your taxes on your behalf and collect your tax refund. However, the IRS created a system to protect you against identity theft. In January, you can go to the IRS website and apply for a PIN (Personal Identification Number). Each year, the IRS will send you a unique PIN. You will have to file your taxes using this PIN because that is the only way they will accept your tax return forms. As of 2019, this service is only available in 19 states. If someone files the tax return forms on your behalf without including the PIN, the IRS will automatically reject it. 8 – Determine Your Tax Payments This year end tax tip is significant because it can help you avoid the underpayment of the estimated tax penalty. This penalty will apply to your situation if you pay fewer taxes than what you owe to the IRS. The good news is that you can determine if you have been paying sufficient taxes throughout the year by using the IRS Withholding Estimator. If you didn’t pay enough taxes, you can adjust the amount of taxes that the IRS is withholding from your year-end paycheck via your W-4. 9 – Know When To File Your Taxes In 2022, the tax season opened in the last week of January and closed on April 15th. However, filing your taxes as soon as possible is a better option if you get a tax refund. Think about your tax refund as a free loan that you are giving to the government. So, the sooner you can get it, the sooner you can pay down your debt, increase your savings, or invest it to make more out of it.  10 – Deadline For Your Tax Contributions December 31st is the deadline for all your 2021 contributions. If you miss this deadline, you will have to wait another year to benefit from their tax advantages. However, there is an exception for HSAs and retirement accounts such as Roth or Traditional IRAs. You can make non-payroll contributions until April 15th. 11 – Accelerate Your Business Payments If you own a business, you might want to accelerate your business payments if you had a significant year in terms of revenue. This strategy consists of paying your expenses for next year before Dec. 31st. In this case, you can take advantage of the tax deductions immediately instead of waiting another 12 months. So, pay for your rent or buy those big purchases before Dec. 31st to take advantage of those tax deductions.

Tax Planning – Standard Deduction vs Itemized Deduction?. I know filing your taxes is not the most entertaining thing to do. However, understanding how it works is necessary. That way, you can be sure that you are making the right financial decision. According to Taxfoundation, only 13.7% of taxpayers chose the itemized deduction for 2021. But what is the best tax planning deduction for your financial situation? What Is Standard Deduction? The standard deduction is easier to manage and understand than the itemized deduction. It is a fixed dollar amount that you can deduct from your taxable income. No matter how much you make or give. The deductible amount is the same for everyone with the same filed tax status. In 2021, the standard deduction: $12,550 for single or married filing separately $25,100 for married filing jointly $18,800 for&

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