Do yourself a favor and before the year winds down, add one more item to your holiday checklist: tax prep. With all of the holiday craziness, it’s easy to forget that now is the critical time take care of year-end tax planning. I’ve learned the hard way how much you can forfeit in tax savings by failing to take a few simple steps before ringing in the new year.
Last year, when I made the transition from full-time employee to becoming a self-employed writer, I waited until the 11th hour to think about taxes. That’s right, in April I was scrambling to gather my receipts, tracking down 1099s that got lost in transit and almost had to file for an extension. No Bueno. Not to mention, I missed out on a few simple tax saving opportunities that had already expired on Dec 31.
So take it from me, don’t miss out on these year-end money moves that can help you lower your tax bill or net a sizable refund:
Hustle to save for your side hustle
To avoid being blindsided come tax season, remember to stash away a portion of your side hustle income earned as a cushion to pay for your impending tax bill. The recommended amount? Anywhere from 25–30 percent. And if you haven’t been doing that, take advantage of the holiday season hustle. Expect to see a spike in demand for certain side gigs: pet sitting, ride sharing or delivering packages, to name a few. Be sure to consider alternative ways to save money automatically to get out ahead next year.
As the year winds down, remember that dedicating a small amount of time to these simple tasks can help you get a serious jump start on 2017. Come April, your future self will thank you.
Give to charity
Not only will donating to a charity score you serious do-gooder points, but you’ll also yield benefits come tax time. Look to donate to organizations that are in step with your values: are you an aspiring painter? Consider donating art supplies to a community arts center. Did you adopt your pet? Look up your local no-kill shelter. If you’re looking for guidance on which nonprofits to donate to, do a search on Charity Navigator and be sure to consider what makes a good charity.
Aside from monetary donations, some organizations also accept physical items, such as clothing, furniture, canned food, and even your car. Before stopping by with piles of stuff, check beforehand to see what donations a charity accepts and if it’s a non-profit that you can receive a tax deduction for your donation. And don’t forget to ask for a receipt for your donation; you’ll need a record when filing your taxes.
With charitable donations, you can generally deduct anywhere from 20% to 50% of your adjusted gross income (AGI). Just know that if you decide to take the standardized deduction, you won’t be able to deduct any charitable contributions.
Play the tax-deduction game
If you’re self-employed and had a profitable year (congrats!), make tax-deductible purchases related to your business to help lower your taxes. For instance, invest in a new laptop, home office furniture, a professional membership, or an annual subscription to some essential cloud software. Even better, put on your learning cap and enroll in an online course — those can be tax-deductible, too. Plus, with end-of-year sales, you’ll be able to take advantage of some solid deals. Of course, make sure it’s a reasonable purchase that’s within your budget — hold off on buying that catamaran for now.
Get organized to itemize
If you’re going to itemize versus going with the standard deduction, you’ll need to gather the proper documents. These include receipts from donations you made to non-profits. You’ll also want to keep track of mileage, gather receipts for out-of-pocket expenses such as supplies and parking fees you paid for when volunteering your time. You can also itemize expenses related to job hunting, such as parking and transport to job interviews, printing your resume, and any employment agency fees.
Other documents you’ll want to begin gathering include the 1098-E and 1098-T to receive a deduction on your student loan interest and tuition paid, home mortgage statements, and medical expenses if they cost more than 10% of your adjusted gross income.
Put off receiving your bonus
Unless you could use it during this time of year, ask your employer if you can put off receiving your bonus until after the new year. This simple act of delayed gratification will lower your income for 2016. In turn, this will lower the total amount you’ll need to pony up in taxes. Anticipate owing money to Uncle Sam? If you can afford to, put away part of it for your taxes. While it may not be the most exciting thing to do, your finances will be better off down the line.
Contribute to your retirement
If your employer offers a 401(k) retirement plan, consider increasing your contribution before the new year. If you’re under 50, the maximum contribution limit in 2016 is $18,000 for the entire year. Money toward your 401(k) is tax-deferred, which means you’ll be taxed when you take money out, your contributions will bump down your taxable income. And if your employer provides a match, that’s all the more reason to contribute a little extra now. That’s free money you’d be leaving on the table.
While you have until April 17, 2017, to make contributions to your IRA accounts for 2016 if you can swing it, put in a little extra at the end of the year. Contribution limits on IRAs for 2016 are $5,500, and $6,500 if you’re 50 and older. If you have a traditional IRA, where contributions are made from pre-tax income, you will be able to deduct contributions on your tax return.
Get your flexible spending account down to zero
If you put in money toward a flexible spending account (FSA) to use toward medical expenses or childcare, now is the time to spend whatever’s left. Otherwise, you’ll lose it. Get your eyes checked, get customized earplugs or a pair of prescription sunglasses. Hard-pressed to find ways to spend any remaining funds? Check out fsastore.com, a one-stop-shop stocked exclusively with FSA-eligible products.