Learn 3 Ways to Do Your Year End Tax Planning

Man putting tax refund money in his shirt pocket.
Tax planning puts money in your pocket.

Year-end tax planning saves you money by uncovering opportunities to withdraw money from an IRA this year and pay no tax; withdraw slightly less from your IRA, and thus your social security won’t be taxable; ​convert a portion of your regular IRA to a ROTH IRA and pay tax at only the 15% rate; harvest capital gains at the 0% tax rate; ​harvest capital losses so a portion of them can be used against ordinary income.

You will never discover these opportunities without doing the planning before year-end. Below are three ways you can go about it.

1. Use An Online Program

You can use this 1040 tax calculator to estimate your federal tax liability for the current year. The calculator has pop-up screens that help you estimate your deductions, exemptions, and tax credits.

Gather the following information before you get started:

  • Last year’s tax return - use this as a template to estimate what should go on it for the current year
  • Pay stubs to show your year-to-date income and retirement plan contributions
  • Investment statements to show interest, dividends. and realized gains/losses as well as unrealized gains/losses
  • Information on all expected income and deductions, including health care expenses, mortgage interest, estimate of net income from self-employment, and information about any other tax-related transactions that occurred during the year

    Pros: The software does a good job of factoring in current changes in tax law. We have input information from real tax returns, and if the input is correct, the software delivers an accurate answer.

    Cons: If ​you do not do your own tax return or investing, gathering the correct information and figuring out how to input it can be a cumbersome task.

    In addition, if you are already collecting Social Security benefits you will need to use a separate online calculator to determine the portion of your benefits that are taxable so that you can input that number into the 1040 calculator above.

    2. Use Last Year’s Tax Return

    One easy way to conduct year end tax planning is to print last year’s return, and in the margin write in your estimate of this year’s numbers. You can do a ball park estimate - get more detailed by gathering estimated on every line entry. Once you've written in your numbers, do the calculations with the new numbers to estimate your taxable income and then see what tax bracket your top tier of income falls into.

    Use this tax bracket to determine if you should look for extra deductions or if you have room in your tax bracket to realize more income, or use capital gain or loss harvesting.

    Pros: Quick, easy way to get a ballpark estimate.

    Cons: Does not allow you to account for any changes in the tax code, such as any credits you may be eligible for. In addition, if you do not do your own tax return gathering accurate estimates, and figuring out how everything ties together can be a challenging task.

    3. Hire a Professional

    You can ask your CPA or qualified financial advisor to run a year-end tax projection for you.

    You are likely to get an accurate result as well as sensible recommendations.

    You will need to provide them with an estimate of everything you think will impact your tax return, then ask them for advice as far as types of retirement plans to contribute to, ways to increase deductions, or if you should intentionally realize capital gains or losses.

    Pros: A professional will know what questions to ask to help you gather the correct information. They will also be able to help advise you on specific actions to take, based on your numbers (which is always better than a generic article you read on the internet).

    Cons: Cost. Most professionals will charge an hourly rate to do this type of work.