A Tax Pro’s 6 Year-End Moves That Can Lower Your April Bill

Many people only start thinking about their annual tax bill when April arrives, by which point there is little left to change.

"The best time to fix an April tax bill is October," said Tiffany Nellums, EA and tax principal at Nexera Tax. "By the time your W-2 shows up, most of your options are gone."

Experts say it helps to start planning before the year ends. Nellums and two other professionals outlined six tax steps to consider before Dec. 31 if you want to reduce the amount you owe.

1. Start with a Tax Projection

Nellums advised using your latest pay stub and last year’s return to estimate where the current tax year is heading. Side gigs, bonuses, job changes and investment sales can all change what you owe, so they should be included in the calculation.

Mark Clark, CFP and founder of Prestige Advisors, said he bases his year-end planning on that forecast. Once you know your year-to-date income, you can see how much space remains in your current tax bracket. That remaining room may be a useful place for a partial Roth conversion or an additional IRA withdrawal.

2. Use Your Final Paychecks to Catch Up

If the estimate shows you are short on withholding, Nellums suggested submitting a new Form W-4 to increase taxes taken from your last paychecks. The IRS generally treats withholding as if it were paid evenly throughout the year, which can reduce an underpayment penalty in a way a late estimated payment may not. Freelancers and business owners should also keep the fourth-quarter estimated tax deadline in mind.

3. Finish Workplace Contributions Before the Deadline

The 401(k) limit for the current year is $24,500. IRA contributions can still be made until the filing deadline, but 401(k) contributions must come from an eligible paycheck before year-end. Clark also said it may be a good time to top off HSA contributions if there is still room.

There is also a new complication for higher earners age 50 and older: catch-up contributions may now need to be made as Roth contributions. Nellums recommended checking with human resources before the last payrolls of the year.

4. Review Investments for Tax-Loss Opportunities

Clark suggested looking through taxable investment accounts for losses that could be used to offset gains. Investors should watch the wash-sale rule, which disallows the deduction if you buy the same or a substantially identical investment within 30 days before or after the sale.

5. Reconsider Your Charitable Giving Strategy

Recent changes have altered the tax treatment of charitable gifts. Nellums said people who claim the standard deduction can now deduct up to $1,000 in cash donations to qualified charities, or up to $2,000 for married couples filing jointly. For itemizers, only giving above 0.5% of adjusted gross income is deductible.

That threshold makes timing more important for itemizers. Clark suggested combining two years of donations into one year or giving directly from an IRA after age 70 1/2. No matter which approach you choose, receipts should be kept.

6. Business Owners Should Check Section 179

Small-business owners who purchased equipment this year may be eligible for Section 179, according to Cameron Botes, founder and tax advisor at BizBud. The rule allows a business to deduct the full cost of qualifying property in the year it is bought and placed in service instead of writing it off over several years. Real estate is not eligible.

Botes gave the example of a photography business with $100,000 in revenue that buys a $10,000 camera, which would reduce the taxable amount to $90,000. He added that some leased assets may also qualify, depending on the business structure. Botes said owners should raise the issue with their accountant early, since the equipment must be in service by year-end to count.