As we approach the end of the year, it’s time to start examining your income and expenses, and planning for your taxes. Going through your finances before the calendar year comes to an end can allow you to make strategic tax moves that will benefit you when you file your return. However, you have to make most of these moves before the ball drops on New Year’s Eve, or you’re going to be out of luck. Here are some tax strategies to take advantage of before the end of the year.

Defer Your Income

While not all income is deferrable, some types of income may be pushed off into the next calendar year. Why would you want to do this? This strategy can be beneficial if you’ve just barely stepped up into the next tax bracket for this year. For example, perhaps you receive an inheritance this year that pushed you into a higher tax bracket, and it’s going to significantly increase your tax bill. If you defer a portion of your end-of-year income to next year, you may be able to drop yourself back into your normal tax bracket and save on your tax bill.

While W-2 employees likely can’t defer their wages or salaries, you may be able to postpone receiving your end-of-year bonus until after New Year’s. Self-employed individuals and freelancers have a bit more leeway on deferring payments. You can much more easily send out your invoices late in December to ensure your payments don’t come in until after January 1^st, for example. Just make sure that you’re set up to be taxed on a cash basis, rather than an accrual basis; otherwise, you’ll be taxed on the income you earned in December regardless of when you send out those invoices.

You should also examine your expected income for next year if you plan to defer your income. Obviously, you don’t want that deferral to push your next year’s income into the higher tax bracket, so this strategy is best used if you have a one-time windfall that has impacted your taxable income.

Sell Stocks at a Loss

The general rule of investing is to “buy low, sell high.” However, if you’re looking at things from a tax perspective, sometimes selling your stocks at a loss can be beneficial. Selling stocks and mutual funds to realize losses is known as “loss harvesting,” and it can be used to offset any taxable gains you may have realized during the year. Your losses on your investments can offset your gains dollar for dollar, so use them accordingly.

Additionally, if your losses exceed your gains, you can use up to $3,000 in excess losses to reduce your other taxable income. And, should you have more than $3,000 in excess losses, they can be carried over into the next tax year, so you can offset your 2023 gains. Naturally, you don’t want to overdo this, since the entire point of investing is to realize gains. In certain cases, however, harvesting some losses can save you more in taxes than it will cost you on your investments.

Maximize Retirement Account Contributions

It’s always a good idea to contribute the maximum amount to your retirement accounts, if you’re at all able to do so. Not only is this just good financial sense in terms of saving for your future, but it also makes good tax sense. Pre-tax contributions to your 401(k) reduce your overall taxable income for the year. You can also contribute to a traditional IRA, then deduct your contribution amount on your tax return. If you don’t immediately have the cash to maximize your IRA contribution before the end of this year, don’t worry; this tax deduction is actually available through the tax deadline in the spring. You can continue to make contributions through April 15, 2023, and still deduct it on your 2022 personal tax return.

Mind the Alternative Minimum Tax

Be wary of the alternative minimum tax (AMT) when you’re taking your tax deductions; accelerating your deductions can sometimes inadvertently trigger the AMT and increase your tax bill rather than reducing it. The AMT was originally designed to ensure the wealthy didn’t take excessive tax deductions to avoid paying taxes. However, it will sometimes impact the middle class.

The AMT is separately calculated and has different rules. For example, some deductions that are available under regular tax law are not permitted if the AMT is applied to your account. So, trying to defer payments or income in order to claim those deductions that are ineligible under the laws of the AMT wouldn’t offer any benefit to you. Ultimately, you’ll have to pay whichever tax bill is higher.

If you want to ensure that your tax strategy is sound before the end of the year, contact Camputaro & Associates today to speak with a CPA.