It feels like summer vacation was just here, but as soon as the kids went back to school, stores and local businesses started pulling out the Halloween supplies, and now, with two weeks left in October, Christmas decorations are already taking over many retail displays. Believe it or not, the end of the year is upon us, and we’re heading into a season full of holidays and celebrations. But before you start toasting to the holidays, it’s important to realize that the fourth quarter isn’t just for parties – it’s also a critical time to think about your business and your tax strategies so you are well positioned for next April.
Fourth Quarter Tax Planning
When it comes to your business, the fourth quarter is a good time to review your year-to-date performance and plan for an end of the year sales push or marketing campaign. The fourth quarter is also a good time to review your tax strategy and think about income and deductions. A little bit of tax savvy now will pay off big when the new year comes around. Read on for some of our expert tips on steps you can take now to minimize your tax bill next year.
Five Tax Tips for Q4
Take a Look at Your Withholding Rates
Now is a great time to revisit your withholding rates and make sure they are still appropriate. Do you expect to receive any bonuses or other large sources of income towards the end of the year? If so, you may want to increase your tax withholding to avoid an unpleasant surprise in the spring. If you underpay this year, you could be stuck with a big bill or even a penalty in April.
Optimize Your Charitable Contributions
You probably already know that you can deduct charitable contributions—subject to limits—to reduce your tax burden. But you might not know that a tax advisor can help you use your charitable contributions strategically to create a sophisticated tax plan. Donating appreciated stock is a great way to make an end-of-year contribution to a charity, because you get to deduct the fair value for the shares at the time you sold them without paying any capital gains on the appreciated value. Other strategies include establishing a donor-advised philanthropic fund to front-load deductions for charitable contribution donations that will occur in future years.
Use Investment Losses Strategically
Each year when you file your taxes, you can deduct up to $3000 of capital losses from your income. If you have losses greater than $3000, you can offset them with capital gains or carry the loss forward. One way to offset losses greater than $3000 is to sell stocks that have risen in value, but there are many factors to consider when balancing your profits and losses. Your tax advisor can best advise you on the specifics of your situation and help you optimize your capital gains and losses to reduce or eliminate taxes on your capital gains.
Don’t Forget About the Gift Tax Exemption
For the 2021 tax year, you can gift up to $15,000 per beneficiary without paying taxes on the gift; that amount will increase to $16,000 for 2022. Monetary gifts can be a good way to manage your tax burden, especially if you intend to share your wealth with family members at some point in the future.
Look at Other Tax-Advantaged Accounts
The end of the year is a great time to review accounts that you may have set up for education (529) or health care (HSA). For most people, it makes sense to contribute the maximum allowable amounts to lessen your tax burden, but your tax advisor can help you manage these accounts most effectively.
Other Fourth Quarter Tax Strategies
The five steps outlined above are a great start for your end of year tax planning, but depending on your income levels, you may want to consider doing more. If you expect your tax rate to rise, you should talk with your tax advisor about setting up a Roth IRA. If you’ve had a particularly successful year, pay attention to the Alternative Minimum Tax. A good tax advisor can help you navigate the nuances of these types of issues within the framework of your personalized tax plan.