Year-End Tax Planning Steps to Take Before December 31

As the calendar year draws to a close, it is easy to give holiday plans and other commitments more attention than financial housekeeping. Still, the final months of the year can be an important window for reviewing your tax position and identifying decisions that may no longer be available once January arrives.

Tax filing season may seem distant, but a timely review can reduce uncertainty, limit the risk of an unexpected balance due, and help you act on available tax-saving opportunities. Whether your income, household, or financial goals changed this year, taking stock now can help you enter the new year better prepared.

Check Your Withholding and Estimated Payments

Your paycheck withholding and estimated tax payments should reflect your current circumstances. A job change, pay increase, retirement, investment earnings, self-employment income, or changes in your family may all affect the amount of tax you will ultimately owe.

When too little tax is withheld from your wages, you may face a tax bill when you file. When too much is withheld, you may have been sending more of your money to the government throughout the year than necessary.

It is equally important to review estimated payments if you receive income without regular withholding, including income from self-employment, rentals, investments, or retirement accounts. An insufficient payment could result in a remaining balance and possible penalties. A year-end review can help determine whether an additional payment is appropriate before December 31 or ahead of the final estimated-tax due date.

Evaluate Retirement Plan Contributions

The end of the year is a practical time to look at retirement savings progress. Contributions to workplace plans such as 401(k) and 403(b) accounts generally need to be made through payroll before the year closes.

If you have remaining paychecks, increasing your contribution amount may reduce taxable income while putting more toward retirement. It is also worth confirming that you are contributing enough to receive any employer match that may be available.

A Roth IRA conversion may also deserve consideration for some taxpayers before year-end. A conversion typically creates taxable income in the year it is completed, but qualified Roth IRA withdrawals may be tax-free in the future. Because the benefits and tradeoffs depend on individual circumstances, this choice should be considered carefully.

Use Your HSA and Review Your FSA Balance

For individuals enrolled in an eligible high-deductible health plan, a Health Savings Account, or HSA, can provide meaningful tax advantages. Contributions may be deductible, investment growth can be tax-deferred, and withdrawals for qualified medical expenses are generally tax-free.

If you have not reached the applicable contribution limit, you may still have an opportunity to add funds before the deadline.

Also take time to check the status of your Flexible Spending Account, or FSA. Many FSA arrangements include use-it-or-lose-it provisions, which can mean unused money is forfeited after the plan’s permitted period ends. Since employer plans can differ, reviewing the account balance now may help prevent funds from going unused. Open enrollment can also be a helpful time to determine whether your FSA election continues to meet your household’s needs.

Consider Investment Activity and Income Timing

If certain investments declined in value during the year, tax-loss harvesting may be worth reviewing. Selling an investment at a loss can potentially offset capital gains. In some circumstances, losses beyond those gains may also offset a limited amount of ordinary income.

Any investment sale should remain consistent with your long-term objectives. It is also important to understand IRS wash-sale rules, which can restrict the expected tax benefit when substantially similar investments are repurchased too soon.

The timing of income and deductible expenses can matter as well. Depending on your tax situation, accelerating certain deductible expenses or postponing income until the following year could be beneficial. In other situations, taking the reverse approach may be more appropriate. The best strategy depends on your overall tax picture.

Make Charitable Gifts With a Plan

Year-end charitable giving is common, and thoughtful planning may improve the potential tax benefits of your donations.

Keep receipts and written acknowledgments for every contribution you make. Depending on your circumstances, donating appreciated securities rather than cash may be worth considering. Taxpayers who itemize deductions may also want to evaluate whether combining multiple years of charitable gifts into one year could be helpful.

If you want a donation included on this year’s tax return, make sure it is completed by the end of the year.

Complete Required Minimum Distributions

Retirees who must take Required Minimum Distributions, or RMDs, should confirm that those distributions are completed before year-end. Missing an RMD can lead to penalties, so this item deserves close attention.

If charitable giving is part of your plans, a Qualified Charitable Distribution, or QCD, may be an alternative to consider. Eligible taxpayers may give directly from an IRA to a qualifying charity. This may satisfy some or all of an RMD while providing favorable tax treatment.

Prepare Tax Documents Before Filing Season

If you are saving for education through a 529 plan, use year-end as an opportunity to review contributions. Some states provide tax benefits for qualifying deposits, and even modest contributions can add to education savings over time.

It is also helpful to begin assembling tax documents before January. Consider gathering charitable-giving records, mortgage-interest statements, property-tax information, investment documents, childcare expense details, self-employment income records, and medical expense documentation. Getting organized early can make filing season less stressful and reduce the chance that deductions or credits are missed.

The last weeks of the year can pass quickly, and many tax-planning opportunities expire when the calendar changes. Reviewing withholding, retirement contributions, health accounts, investments, charitable gifts, required distributions, education savings, and supporting tax records can make the filing process smoother and help reduce unwelcome surprises.

If you would like assistance reviewing your year-end tax situation, please contact us. Our team can help you better understand your options and make informed use of the planning opportunities that remain before the year ends.