Year-End Tax Planning Checklist
Posted by Anna Traugh on October 11, 2022
The end of September evokes multiple reminders for many of us. It is time to get winter clothes out, make sure the leaf blower is working, trade out hiking boots for ski boots, and start preparing for the end of the year. We form many rituals when the seasons change, and I propose adding one more to the list, year-end tax planning. This is not as fun as prepping for the holidays and Winter adventures, but it should help reduce mistakes, minimize panic in the last week of the year, and avoid regrets when you file your tax return the following year.
Below is a list of common items to address during this end-of-year check-up and a summary of the review that can be done:
Retirement plan contributions: Ensure you are on track to make the appropriate contributions to your employer plans and IRAs. If an employer match is available in your retirement plan at work, make sure you are set to receive the maximum contribution match. Be aware of contribution limits and eligibility for tax-deductible Traditional IRA contributions and contributions to Roth IRAs.
- Required Minimum Distributions (RMDs): If you have an inherited IRA or are age 72 or older, review your pre-tax distributions for the year so far to ensure you have withdrawn the amount required by the IRS. If you have not fully satisfied your RMDs, plan to complete the distributions before the last day of the year to avoid a substantial penalty.
- Charitable Gifts: Plan out your charitable contributions for the year and see how the total amount will affect your taxes. Depending on your gift amount and overall tax situation, it may be better to gift cash or appreciated stock. You could also consider gifting to a Donor Advised Fund instead of directly to a charity. All these factors are good to review so that you can give the maximum amount to your chosen cause and receive the most beneficial tax deduction.
- Qualified Charitable Distributions (QCDs): If you take Required Minimum Distributions, you can also gift directly to a charity from your IRA. This will exclude the charitable gift from your income instead of creating a deduction. This may be a more tax-efficient way to donate and should be evaluated along with the other options available.
- Tax Withholding/Quarterly Payments: Double-check that you have paid enough of your taxes through payroll deductions, retirement account distribution withholdings, and quarterly payments. This should avoid a surprise tax bill when you file your taxes and potentially a penalty for underpaying your taxes throughout the year.
- Capital Gains Management: Evaluate selling investments to realize capital gains or losses in your non-retirement accounts. In high-income years, you may want to sell assets that are at a loss to reduce your tax bill. In low-income years, you might sell investments at a gain to take advantage of being in a lower tax bracket.
- Year-End Mutual Fund Distributions: Mutual funds and ETFs tend to distribute capital gains and dividends to their investors at the end of the year. These funds publish the amount before each distribution so you can calculate what you will pay in taxes. In some circumstances, you may also benefit from avoiding this income.
- Tax Estimate: If you have a unique tax event in any year, it could be beneficial to have an accountant draft an estimated tax return. This could help you estimate how much you will owe in taxes when you file your return and show if you need to send a quarterly tax payment to avoid an underpayment penalty. This can also help with the other topics on this list.
The descriptions above are meant as an introduction to each topic and are intended to encourage a deeper review. Every individual’s tax situation is unique. Creating a tax plan requires knowledge of all the rules and therefore is best completed with the help of your CERTIFIED FINANCIAL PLANNER™ (CFP®) and a Certified Public Accountant (CPA.)
I hope this motivates you to complete a more in-depth review of your taxes this year. Let us know how we can help construct a tax plan and how these areas affect the rest of your financial picture.
Barry Betters, CFP®
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