Smart Tax Moves to Make Before December 31

RamGrows Financial team · 7 min read

Every year around the second week of April, someone sits in our office and learns about a tax move that would have saved them real money, if only they had done it by December 31. The rules did not hide from them. The calendar just ran out.

That is the whole point of this article: most of the tax return you file in spring is actually written in the fall. Once the ball drops in Times Square, your income, your deductions, and most of your options are frozen. Here is what is worth doing before then, and, just as important, what is not.

Step one: find out roughly where you stand

You cannot plan in the dark. Before December, sit down with your pay stubs, your business numbers, and last year's return, and sketch a rough picture: about how much income this year, about how much tax already paid through withholding or estimates. This takes an hour, or one short meeting with a preparer, and it answers the only question that matters: are you on track, ahead, or behind?

If you are behind, you still have time to fix withholding on your last few paychecks or make a state estimated payment. Finding out in April is not planning, it is archaeology.

Moves for employees and families

Feed your workplace retirement plan

Money you put into a traditional 401(k) or similar plan through work generally lowers this year's taxable income, and contributions have to come out of paychecks dated this year. If you can raise your contribution for the final pay periods, that is one of the cleanest year-end moves there is. Contribution limits change from year to year, so check the current number rather than trusting an old article, including this one.

Spend down your FSA

Health flexible spending accounts are use-it-or-lose-it, with only limited carryover depending on your employer's plan. If there is money sitting in yours, December is the time for the eye exam, the dental visit, the new glasses.

Bunch your charitable giving

Charitable donations only help your federal taxes if you itemize, and many families no longer do. One honest workaround is bunching: give two years' worth of donations in a single December, itemize that year, then take the standard deduction the next. Same generosity, better timing. Keep receipts for everything; a warm memory is not documentation.

Harvest investment losses, carefully

If you have investments that dropped and you no longer believe in them, selling before year end lets the loss offset gains you took elsewhere. Two cautions. First, do not let a tax tail wag an investment dog; sell because the investment deserves it. Second, if you buy the same investment back within 30 days, the wash sale rule cancels the loss. The IRS thought of that trick a long time ago.

Moves for small business owners

Time your income and expenses

If you run on a cash basis, like most small businesses, income counts when you receive it and expenses count when you pay them. That gives you a steering wheel in December. Expecting a lower-income year next year? Maybe send the late-December invoices in January. Had a big year? Pay January's rent, stock up on supplies you genuinely need, prepay the insurance. None of this is aggressive; it is just choosing which side of midnight a normal transaction lands on.

Buy equipment you actually need

Tools like Section 179 and bonus depreciation often let businesses deduct equipment quickly instead of over many years, and the equipment generally must be placed in service, not just ordered, by December 31. The dollar limits and percentages change with legislation, so confirm the current rules before you write the check. And note the phrase doing the real work in this heading: actually need. More on that below.

Pay your state estimates on time

New York expects its money through the year, and so does the IRS. If your business had a strong year and you have not been paying estimates, a payment before year end can reduce penalties that are otherwise just money set on fire.

Look at your structure while you can still act

Year end is a natural time to ask whether your business structure still fits, because elections and changes tend to have deadlines. If you have been wondering whether an S corporation election would save you self-employment tax, read our plain-English take on LLC versus S corp in New York and have that conversation in December, not April.

Close your books while you still remember the year

Every deductible expense you fail to record is a donation to the government. A December afternoon spent tidying your records, or better, ten minutes a week all year, is the highest-paid clerical work you will ever do.

The overrated move: buying things for the deduction

Every December, somebody buys a truck they do not need because "it's a write-off." Here is the arithmetic nobody says out loud: a deduction does not make a purchase free, it makes it discounted by your tax rate. As a round-number example, if your combined tax rate is 30 percent, spending $10,000 on equipment saves you about $3,000 in tax. You are still out $7,000. If the business needed the equipment anyway, wonderful, the timing is smart. If it did not, you just paid $7,000 to avoid $3,000. There are cheaper hobbies.

What can wait until spring

Not everything closes on December 31, and it helps to know which doors stay open. Traditional and Roth IRA contributions for a tax year can generally be made up to the April filing deadline. Self-employed retirement accounts like SEP IRAs can often be funded up to your filing deadline including extensions. So if December's cash is tight, some retirement saving can still happen later. The paycheck-based moves, the FSA, the charitable timing, the equipment, the income shifting: those are the ones the calendar takes away.

One more thing, without judgment

If the reason you avoid tax planning is that you have unfiled returns from past years, you are not alone and you are not doomed. Catching up is a known, manageable process, and we walked through it in what to do if you have not filed in years. Current-year planning works much better on a clean slate, and picking the right preparer makes the whole thing less painful than you are imagining.

This article is general information, not personal tax advice; rules and limits change, so confirm the current ones for your situation.

Want to know where you stand before the year closes? RamGrows Financial does tax work, planning, credit repair, and funding preparation every day, in seven languages. Call (201) 253-7771 or visit us at 509 Brighton Beach Ave, Suite 1, Brooklyn, and let's look at your numbers while December can still do something about them.