Tetra Images / Getty Images These year-end strategies include withdrawing from or contributing to a retirement account to take advantage of tax-free withdrawals or reduce your Social Security taxes. You might be able to convert a traditional IRA to a Roth IRA to take advantage of a lower tax rate. You may want to trigger capital gains in a year when you qualify for a 0% tax rate, or harvest capital losses to offset gains you had earlier in the year. The specific financial moves you choose to make will depend on your unique situation, but you won’t discover these opportunities without doing some year-end tax planning. You can go about it in three ways.
Use an Online Tax Prep Program
According to the Internal Revenue Service (IRS), 90% of all personal tax returns were filed electronically in 2021, the most recent year for which comprehensive statistics are available. Online tax preparation software has become the most popular way for individuals to file tax returns. One of the major advantages of using online software is that it’s simple and easy to access. The process will be even easier if you gather the information you need in advance of calculating your taxes and preparing your return. You should collect certain information before you get started:
Last year’s tax return: Use this as a template to estimate what should be included in your current year’s return.Pay stubs: These will show your year-to-date income and retirement plan contributions.Investment statements: Forms from brokerage firms will show interest, dividends, realized gains and losses, and unrealized gains and losses in any trading or investment accounts you have.Miscellaneous information on expected income and deductions: These statements could include anything related to health care expenses, mortgage interest, an estimate of net income from self-employment, and information about any other tax-related transactions that occurred during the year.
An online calculator can be a handy tool to help you get a rough estimate of your federal tax liability for the current year. It will help you estimate your deductions, exemptions, and tax credits. But again, you must have your information on hand so you can enter it into the relevant text fields on the calculator.
Use Last Year’s Tax Return
An easy way to conduct year-end tax planning is to print last year’s return and write in your estimate of this year’s numbers in the margins. You can do a ballpark estimate by comparing this year’s numbers to last year’s. You can control how detailed you get by adding more or less information on each line entry. You can keep things simple by only updating the line items that differ significantly from the year before if you just need a rough estimate of your tax situation. Do your calculations with the current numbers to estimate your taxable income, then see what tax bracket your top tier of income falls into. Look for any last-minute ways you can use available deductions to reduce your tax liability if it looks like you’ve landed in a higher tax bracket or otherwise have more tax liability than last year. Alternatively, you may decide to trigger a capital gain or otherwise increase your income if you have room in your tax bracket to realize more income.
Hire a Professional
You can ask a CPA or qualified financial advisor to run a year-end tax projection for you. This is the most expensive option, but it’s also one of the simplest ways to get the best results. You’re likely to get the most accurate information, as well as sensible recommendations about any options you have available to you to improve your tax situation. You’ll have to provide the advisor with an estimate of everything you think will impact your tax situation if you use this option. Then ask for advice about the types of retirement plans that you might want to contribute to, ways to increase your deductions, or if you should intentionally realize capital gains or losses.
