End-of-Year Tax Planning Starts Now

As fall approaches, now is a great time for end-of-year tax planning. By now, you may have a good idea of how the year is shaping up, but you also still have enough time to make course corrections more meaningful and less painful.

Some simple tax planning strategies you may be able to make now to help maximize your tax outcome in April are:

  • Changing how much tax you have withheld from your paychecks
  • Updating your financial and household information with the health insurance marketplace
  • Tracking your possible tax benefits
  • Estimating your income

Here’s a little more about each of these mid-year tax moves.

1 – Adjust your withholding to take home more pay or to reduce your tax bill.

The Form W-4, which you provide to your employer when you start your job, is important to keep updated. That’s because it determines how much federal income tax your employer withholds from every paycheck. Depending on your marital status and the number of allowances you select, you’ll have more or less tax withheld from each paycheck.

But the right number of allowances in 2016 may not be the right number of allowances in 2017. Your ideal number of allowances can change with common life events, such as a birth, marriage, graduation, home purchase or sale, or unexpected income. However, an estimated two in five taxpayers don’t update their Form W-4 when they experience major life changes.

But you don’t need to have a major life event to update your Form W-4. You may want to change it if you’d rather take home more money throughout the year (and don’t mind a potential tax bill in April) or if you want to pay more in taxes throughout the year so you won’t owe at filing. Either way, with good planning, you can adjust your Form W-4 to meet your specific tax goals.

2 – Update your information with a health insurance marketplace to avoid a surprise tax bill.

Taxpayers who have health insurance through a state or federal marketplace may qualify for the advance premium tax credit (APTC) to help make their premiums more affordable. The size of the tax credit for 2017 is based on estimates of income and family size that taxpayers made as early as Nov. 1, 2016. Because the tax credit goes directly to the health insurance provider throughout the year, taxpayers have to settle up at the end of the year on their tax return, calculating whether too much or too little of this tax credit went toward their premiums.

If you have insurance through a health insurance marketplace, make sure you notify the marketplace about any changes to your household size or income. This will help ensure that your APTC is as accurate as possible. The sooner you notify the marketplace, the better chances you’ll have at minimizing the impact in April.

3 – Track possible deductions and credits to minimize your tax bill.

Deductions and credits are usually based on expenses paid or other actions you take before the tax year ends. Taxpayers who plan ahead can maximize their deductions by making charitable donations and investing in qualifying retirement accounts or other tax-advantaged accounts, such as HSAs. Keep good records of your charitable donations and other expenses you plan to deduct or use to qualify for a credit. Doing so will make tax filing easier and will prepare you if you’re ever audited.

4 – Estimate your income to avoid penalties.

Estimating income can be one of the most difficult parts of tax planning for the self-employed and small business owner. But correctly estimating or projecting your income is an important step in preventing underpayment penalties. To avoid the estimated tax penalty, by the end of the year, business taxpayers must pay 90 percent of the tax they owe for the current year or 100 percent of the tax they owed for the previous tax year.

Self-employed people can pay by making estimated tax payments four times a year: in April, June, September and the following January. If you or your spouse also has a traditional job, you could instead adjust your withholding with your regular employer to cover the taxes you’ll owe from your small business or self-employment income.

5 – People with investment income may have additional options.

If you have investment income, remember that you can offset your capital losses against your capital gains to reduce your net taxable gain. Any net losses can offset your ordinary income by up to $3,000. Tax-loss harvesting is a year-end planning strategy that uses these rules to the taxpayer’s advantage by identifying investments to sell at losses. But beware that this strategy affects your portfolio, so selling certain investments at a loss only to reduce your tax can wreak havoc on your portfolio allocation. With that in mind, consider getting input from an investment advisor and a tax professional before using this strategy.

As the year wears on, you’ll get an even better idea of what life changes and financial situations will impact your tax return. But the runway for meaningful and painless change will shorten. So now is the perfect time for a quick tax review and forecast. For tax planning help, consult a trusted Tax Advisor. Find an office nearest you now!


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