As the year comes to a close, it’s the perfect time to ensure you’re maximizing your tax savings and heading into the new year with confidence. Proactive tax planning can help you avoid surprises in tax season and fully capitalize on deductions, credits, and tax-efficient strategies.
Below are some crucial areas to discuss with your financial advisor to create a tax plan that fits your unique life and business circumstances.
Major life changes to discuss
Marriage or divorce
When your relationship status changes, so does your tax situation. Filing jointly often benefits married couples, but you’ll want to provide your advisor with a full picture of both spouses’ finances. If you’re recently divorced, determining your new filing status (single or head of household) is essential to optimizing your tax outcome.
Important note: We often hear clients express a desire to keep their finances separate after marriage. However, filing separately can lead to a disadvantageous tax situation. Be sure to provide both spouses’ financial information so your tax advisor can determine the most beneficial filing strategy.
Birth or adoption of a child
Congratulations on the newest member of your family! In addition to the joy a child brings, there are valuable credits and deductions available to you. From child tax credits to education savings like 529 plans, your advisor can help make sure you’re not missing any important milestones.
Supporting a family member
If you’re caring for elderly parents or another adult in need, you may be eligible for dependent care deductions or additional credits related to medical expenses or home care costs. Sharing these details with your advisor can help you manage costs and reduce your tax burden.
Home purchase or sale
If you’ve recently bought or sold a home, there are key tax factors to consider. Selling a property could mean paying capital gains taxes, but you may qualify to exclude up to $250,000 ($500,000 for married couples) if it was your primary residence. For homeowners, mortgage interest and property tax deductions can reduce your taxable income if you itemize, so be sure to review these with your advisor to maximize your benefits.
Moving to a new state
Relocating can impact your state tax liabilities and may even offer new state tax credits. Be sure to review the tax implications of your move with your advisor to stay compliant and make the most of state-specific opportunities.
You may also be interested in: Should you migrate to the Sunshine State?
Living or working abroad
If you’re moving or working abroad, it’s critical to keep your advisor informed, as U.S. citizens are taxed on worldwide income. Your advisor can help you utilize the Foreign Earned Income Exclusion (FEIE) or foreign tax credits and ensure compliance with reporting requirements like Foreign Bank Account Report (FBAR) and FATCA Form 8938.
Business-related tax planning
Business structure changes
Whether you’ve formed an LLC, incorporated, or changed your business structure, your tax obligations will have changed. Discuss your current structure with your advisor to ensure you’re optimizing your business tax strategy.
Multi-state operations
If you operate in more than one state, it’s crucial to consider the tax implications. Understanding where your business has nexus can help you meet state filing requirements while avoiding penalties.
You may also be interested in: Sales Tax 101: A crash course for business owners
Year-end expense timing
Deciding when to incur or defer expenses can impact your tax liability. Planning significant capital purchases or business expenses by year-end may help you reduce your taxable income—again, talk with your advisor. You’ll need a tax projection to figure this out.
Hiring decisions
Hiring employees or contractors before year-end requires you to ensure you’ve classified workers correctly and prepared necessary tax forms, like W-2s and 1099s. Your advisor can help you make informed hiring choices that may benefit your tax situation, including work opportunity tax credits.
Employee retirement contributions
Offering retirement plan contributions can not only support your team but also reduce your taxable income. SEP-IRAs, SIMPLE IRAs, and 401(k) plans are all options to explore with your advisor.
Investment and financial strategies
Capital gains and investment sales
If you’re considering selling assets, it’s important to discuss the tax implications with your advisor. Understanding the difference between short- and long-term capital gains, as well as strategies like tax-loss harvesting, can help minimize taxes on investment income.
Filed an 83(b) election
If you’ve received restricted stock or stock options, consider whether you’ve filed an 83(b) election. This election can start the clock on capital gains treatment earlier, potentially lowering your tax rate when you sell. Be sure to let your accountant know so they can report it correctly.
Charitable contributions
Charitable giving offers both personal and financial rewards. Your advisor can help ensure that your contributions are properly documented and suggest strategies, like donating appreciated stock, which can provide extra tax advantages.
Retirement contributions
Maxing out your contributions to retirement accounts like IRAs and 401(k)s can reduce your taxable income. If you’re over 50, take advantage of catch-up contributions to maximize the tax benefits of your retirement savings.
Qualified Small Business Stock (QSBS) sales
If you’ve sold Qualified Small Business Stock (QSBS), you may be eligible for a valuable tax benefit, allowing up to $10 million in tax-free capital gains if specific criteria are met. Check with your advisor to see if your sale qualifies.
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)
Make sure you’re maximizing contributions to HSAs and FSAs, as these accounts provide tax advantages that can reduce your taxable income. Also, remember to use FSA funds by year-end to avoid forfeiture, as most FSAs have a use-it-or-lose-it policy.
Sold stock or stock options
If you’ve sold stock or exercised stock options this year, gather all relevant statements from your investment accounts to review with your accountant. This helps avoid IRS matching notices and ensures everything is accurately reported on your return.
You may also be interested in: A beginner’s guide to tax-efficient investing
Tax documentation and reporting
Tax projections
Creating a mid-year or year-end tax projection with your advisor can help prevent surprises when it’s time to file. This is also a great time to evaluate if adjusting your estimated tax payments or withholdings could reduce your overall tax bill.
Reporting income and deductions
Before year-end, make sure all income, deduction records, and tax forms (e.g., 1099s, W-2s, K-1s) are organized and available. These documents will help avoid delays and ensure accurate filings.
Cryptocurrency transactions
If you’ve dabbled in cryptocurrency, be aware that these transactions carry tax reporting obligations. Collect and review any relevant documents to simplify reporting at tax time: IRS Releases Digital Asset Draft Form 1099-DA: What you need to know.
Estate and legacy planning
Updating wills and beneficiaries
Estate plans should reflect major life events, like marriage, divorce, or the birth of a child. Reviewing these documents annually and discussing any changes with your advisor will help ensure your assets are handled according to your wishes and tax efficiently.
Gifting strategies
Consider making use of the annual gift tax exclusion. This may provide a tax-efficient way to transfer wealth to family members or support charitable causes.
We’re here for you
The best way to avoid surprises during tax season and ensure you’re taking full advantage of available deductions and strategies is to keep your financial advisor and tax professional informed about major life events, business changes, and investment decisions.
Year-end tax planning is a powerful tool that can set you up for a financially healthy year ahead. If you have questions or need personalized advice, don’t hesitate to reach out—now is the time to act.