With the holiday season now upon us, this time of year can be hectic and pull folks in a lot of different directions. One important thing people may either forget about or postpone is year-end financial planning. Taking a few minutes to sit down, think about these matters, and take follow-up actions can go a long way to reducing your tax liability and increasing your wealth. Let’s take a look at seven simple tasks we can all take at or around year end to improve our financial health and wealth.

  1. Tax-Deferred Savings Contributions:

We are fortunate to have a number of tax-sheltered (or tax deferred) vehicles for retirement savings. These vehicles, such as IRAs, 401Ks, 403Bs, etc., offer significant advantages for savings, namely, the (temporary) absence of taxes on both income and capitals gains. The compounding effect of growth without the burden of taxation is a very significant advantage compared with taxable accounts over long periods of time. Everyone who can do so should take advantage of this attractive savings vehicle even if it is a small amount. Regular contributions, even if small, can add up over long periods of time due to the impact of compound growth. The contribution limit for an IRA (either traditional or Roth) is $5500 ($6500 if 50 or over) and for 401Ks is $18,500 ($24,500 if 50 or over). 401Ks also have provisions for company contributions which can be significant. Other retirement savings that offer deferred tax savings benefits include a Savings Incentive Match Plan for Employees (SIMPLEs), and Solo 401K for sole proprietors. Year-end review and making contributions to these advantaged savings vehicles can go a long way to improving your wealth and retirement readiness.

  1. Tax deductible contributions:

Who doesn’t want to reduce taxes? An important year-end activity to reduce your federal taxes would be to look at certain expenses or contributions that are tax deductible. Some of the most common tax deductible items include: charitable contributions; retirement account contributions to IRA and 401Ks; healthcare savings account (HSA) contributions; sales taxes; health insurance premiums; property taxes; certain job-related expenses such as training and education; car mileage used for work (not commuting); and job search expenses. A good year-end activity to save on taxes would be to be sure, if you have these expenses, that you have retained good records in order to include them on your tax return.

  1. Gifting using annual exclusion:

In the area of estate planning, every person has both a lifetime gift/estate tax exclusion of $11.2 million and an annual gift tax exclusion of $15,000. If you are seeking to reduce potential estate taxes, one can use the annual gift tax exclusion to reduce their estate. Under the rules for annual gift tax exclusion, you can give up to $15,000 to as many individuals as you wish and not have it count against your lifetime exclusion of $11.2 million. This can be an important year-end activity that could go long way to reducing your potential estate taxes. Gifting using the annual exclusion is a simple way to do some advance estate planning without incurring the cost of an estate attorney.

  1. Review RMDs

IRAs and 401ks savings vehicles, discussed above, are wonderful ways to grow a retirement nest egg because one enjoys tax-deferred growth for a long time, in some cases over 50 or 60 years. But eventually, Uncle Sam is going to collect what he is owed for all those years of deferred taxes. This is done through what are known as Required Minimum Distributions (or RMDs). Once a person turns 70-1/2, whether still working or not, he/she has to begin taking RMDs against their tax-deferred savings accounts (IRAs, 401Ks, 403Bs, etc). Missing these withdrawals can be extremely costly (penalties can run as high as 50% of the RMD). Even though many financial advisors should provide the RMD amount for you, each of us is responsible for making this withdrawal in the correct amount. Year end is a very good time to review this and take necessary actions to make sure you have completed your RMD. 

  1. Accelerate business expenses

There are quite a number of business-related expenses that can be accelerated in the current year and deducted to reduce your current year adjusted gross income (AGI) and therefore your current year tax liability. Some types of job-related expenses that can be accelerated include: paying next year’s dues for professional societies; job search expenses if you know you will change jobs in the upcoming year; early renewal of subscriptions; early payment of certain fees; and replacing old equipment in the current year.

  1. Review your estate plan

Everyone should have four basic parts of an estate plan in place: a will, a durable power of attorney, a living will (or health care directive), and a health care power of attorney. Year end can be a good time to review these documents to make sure they are up to date and reflect current wishes and objectives.

  1. Deferring income

With respect to year-end investment management, an option to reduce taxable income can be to postpone into the following year investment liquidations that would trigger capital gains; and also take losses on investments in the current year. With respect to earned income, if one has substantial year-end bonus payments, it may be worth considering postponing the payments into the following year if your employer will agree to do that.


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