Year-end tax planning helps you discover planning opportunities. Perhaps you can withdraw money from an IRA this year and pay no tax, or withdraw slightly less from your IRA, and thus your social security won’t be taxable, or convert a portion of your regular IRA to a ROTH IRA and pay tax at only the 15% rate. You will never discover these opportunities without year-end tax planning.
Three Ways To Do Year End Tax Planning
1. Use An Online Program To Do Year End Tax Planning
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.
- Information needed to run a year-end tax projection:
- Last year’s tax return
- Estimate of this year’s income and deductions, which can be found by looking at recent pay stubs, mortgage statements, total interest/dividends received this year, capital gains/losses realized this year, 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 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.
2. Year End Tax Planning By Using Last Year’s 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.
- Information needed to run a year-end tax projection:
- Last year’s tax return
- Estimate of this year’s income and deductions which can be found by looking at recent pay stubs, mortgage statements, total interest/dividends received this year, capital gains/losses realized this year, estimate of net income from self-employment, and information about any other tax-related transactions that occurred during the year.
Pros: Quick, easy way to get a ballpark estimate.
Cons: Does not allow you to account for any changes in the tax code. In addition, if do not do your own tax return gathering accurate estimates, and figuring out how the return ties together can be a cumbersome task.
3. Professional Year End Tax Planning
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.
- Information needed to run a year-end tax projection:
- Last year’s tax return
- Estimate of this year’s income and deductions, which can be found by looking at recent pay stubs, mortgage statements, total interest/dividends received this year, capital gains/losses realized this year, estimate of net income from self-employment, and information about any other tax-related transactions that occurred during the year.
Pros: A professional will know what questions to ask to help you gather the correct information. They will also be able to help specific actions to take, depending on what the projection reveals.
Cons: Cost. Most professionals will charge an hourly rate to do this type of work.
