end of year tax planning

As the year comes to an end, it’s an opportune time to take stock of your financial situation and implement strategies to optimize your tax position. End-of-year tax planning is a crucial aspect of managing your finances. It allows you to make informed decisions that can positively impact your tax liability. In this article, we’ll explore various tips to help you navigate the complexities of the tax code and make the most of available opportunities. 

Review Your IRS Account 

Every taxpayer should have an online account with the IRS. In your account you can view any tax balances, payment history or payment plans. You can access tax records, manage communication preferences from the IRS, and view your Power of Attorney authorizations. You can also make payments or request a payment plan with the IRS. 

If you do not have an IRS online account, you can create one on their website. Alternatively, if you want to access your tax information without using your online account, you can request an Account Transcript by mail. Knowing where you stand with the IRS is always crucial. Doing this before tax season is key as it can help prepare you for a tax bill or refund. 

Organize Your Records 

Getting organized can help facilitate a smooth filing season. It’s important to make sure you have all relevant tax forms before filing. This can help avoid errors that can lead to rejections or even IRS audits. You should have a W-2 form from each of your employers. You may also receive 1099 forms if you earn income from other sources. For example, Form 1099-INT will be sent to all taxpayers who were paid interest on financial accounts. Form 1099-G will be sent to anyone who received unemployment benefits. Form 1099-DIV will be sent to all taxpayers who received at least $10 in dividends and distributions.

You’ll also want to collect any IRS notices you receive throughout the year.  Having these documents on hand when filing your tax return will allow a much smoother filing process. Don’t be tempted to file before receiving all of these key documents. Doing so can lead to underreported income, which is a big red flag for the IRS.  

Check Your Individual Tax ID Number (ITIN) 

An ITIN is a tax processing number that the IRS issues to individuals who are required to have a U.S. taxpayer ID number but don’t qualify for a Social Security number. Typically, an ITIN is valid unless you did not use it at least once during the previous three-year period. After this, the ITIN would expire. In other words, if your ITIN wasn’t used on a federal tax return at least once for tax years 2020, 2021, and 2022, it will expire on December 31, 2023. While the IRS will still accept a tax return with an expiring or expired ITIN, it could result in delays.   

Update Your Withholding 

Having the wrong amount withheld from your paychecks can result in a tax bill or a larger refund. If you had a tax bill last year, it could be that you did not withhold enough from your paychecks. While a larger refund sounds positive, it could mean that you withheld too much during the year. This means you could’ve had more money in each paycheck during the year. Some people even like to compare this to an interest-free loan to the government. 

If you had a major life change, it may be a good time to adjust your withholding. This includes a marriage, divorce, the birth of a child, or getting a second job. The IRS website has a free Tax Withholding Estimator tool that can help you calculate the correct amount of tax to withhold from each paycheck. Adjusting your withholding is as simple as submitting a new Form W-4 with your employer. 

In some cases, you may not have an employer to withhold tax for you. This is common for self-employed individuals or those who have investment income, pensions, Social Security benefits and other sources of income. If this applies to you, it’s important to make estimated tax payments to avoid a tax bill and penalties. The last quarterly tax payment for 2023 is due on January 16, 2024.  

Leverage Tax-Advantaged Accounts 

Leveraging tax-advantaged accounts at the end of the year is a financial strategy that can help optimize your tax situation. For example, you can contribute the maximum allowable amount to your employer-sponsored retirement plans, such as a 401(k) or 403(b). These contributions are generally tax-deductible, reducing your taxable income. In 2023, you can contribute up to $22,500 to your 401(k), 403(b), most 457 plans, and federal government’s Thrift Savings Plans. If you are age 50 and over, you can contribute an additional $7,500 in 2023. 

If you have a heath savings account (HSA), you can also make more contributions to this account up until the April tax deadline. HSA contributions are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are tax-free as well. You can also make additional contributions to your flexible spending account (FSA) if you haven’t reached the maximum limit of $3,050 in 2023. These contributions are made with pre-tax dollars, reducing your taxable income. Keep in mind, however, that contributions made to your FSA do not carry over to the next year. On other words, they have a “use it or lose it” policy. 

Tax Relief for Taxpayers in 2023 

Following these steps can help you prepare for the 2024 filing season.

By strategically implementing these tax planning strategies, you can optimize your financial position and start the upcoming year on a sound financial footing. Consult with a tax professional or financial advisor to tailor these end of year tax planning strategies to your specific situation. More importantly, this will ensure compliance with the latest tax regulations. Taking the time to plan now can mean reduced taxes and improved overall financial well-being. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities. 

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