Five Year-End Tax Strategies To Consider

The following article was first published on the Insights section of Whittlesey’s website. It is reposted here with permission. 

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To enhance your tax advantages, take action before Dec. 31.

If you take the correct actions before the end of the year, you could save on your taxes, regardless of whether you are having a great year, recovering from recent losses, or still having trouble getting off the ground.

Here are a few effective tax techniques to help lower taxes for you or your business.

Retirement Accounts

One of the best tax techniques you can use to help lower your tax liability is to max out your contributions to employer-sponsored retirement accounts. 

Contributions to these kinds of programs are known as tax-deferred income. This is because you don’t have to pay tax on the income now, but you will have to pay tax later when you withdraw from the fund.

These employer-sponsored accounts include 401(k), 403(b), or 457 accounts. 

The maximum deferral contributions you can make in a calendar year are capped at $20,500. However, you can increase this by $6,500 for those above the age of 50, as many people are pushing to maximize their retirement funds as they approach retirement age.

The maximum deferral contributions you can make in a calendar year are capped at $20,500.

While you can contribute a maximum of $20,500 to your retirement accounts, it’s important to understand that your total contribution cannot be more than your earned income that year.

Additionally, you should note that Roth retirement accounts are not tax deductible. These accounts are set up in a unique way so that you pay taxes now but gain long-term tax benefits. 

This is because the gains you make within the Roth account, along with the withdrawals, are all free from income and capital gains tax.

Contributing to an employee retirement fund is one of the best ways to reduce your taxable income. While tax is deferred, you still manage to hold and grow the money tax-free. 

This makes contributing to a retirement fund one of the most popular options for both business owners and employees planning for retirement.

Charitable Contributions

Charitable contributions made to registered organizations can be tax deductible. 

There are some limitations when it comes to these kinds of contributions, as you can deduct no more than 60% of your AGI of cash gifts and no more than 30% of non-cash contributions.

When it comes to charitable contributions, it’s always a great idea to consult with a tax professional. Your tax advisor can help evaluate the deductibility of your contribution.

Tax Accounting Method Changes

Adopting or changing income tax accounting methods can provide business taxpayers with valuable opportunities for timing and recognition of items of taxable income and expense, which determines when cash is needed to pay federal tax liabilities.

Accounting methods can either result in the acceleration or deferral of an item or items of taxable income or deductible expense, but they do not alter the total amount of income or expense that is recognized during the lifetime of a business.

As interest rates continue to rise and debt becomes more expensive, many businesses may want to preserve their cash, and one way to do this is to defer their tax liabilities through their choice of accounting methods.

Organizing Records

The simplest tax strategy you can use to help reduce your taxable income for the year is to keep your records in order. 

This means that you should keep an accurate record of both your income and expenses for the year. 

It’s important to keep a record of even the smallest of business expenses, as these can all be deducted when calculating your net profit for the year.

It’s important to keep a record of even the smallest of business expenses, as these can all be deducted when calculating your net profit for the year.

Keeping a record of these figures can help save you time during filing season, as you would already have everything you need for your submission. 

In many cases, business owners overlook expenses that can actually be deducted.

Work-Related Expenses

Expenses that you incur on behalf of the business are eligible tax deductions you can claim. Here’s a quick look at some of the most common tax-deductible expenses and what information you need to keep on hand.

• Business Meals: Business does not always get done in an office. Businesses are allowed to write off 100% of business meals until Dec. 31, 2022. The business owner or an employee must be present for the meal, and it must be provided from a restaurant and cannot be lavish or extravagant.
• Travel Expenses: If you needed to travel for work, you can write off all the related expenses. This includes the cost of airfare, car rental, hotels, and meals. In order to deduct travel expenses, you’re going to need to prove that the trip was for business and keep a record of all the receipts.
• Business Insurance: Business insurance is an essential part of running your business. Better yet, you can deduct your total business insurance premiums from your taxable income for the year.
• Office Expenses: There are tons of small office expenses that you can write off when calculating your tax liability for the year. This includes things such as printers, paper, pens, computers, and even work-related software. You can also deduct the postage and shipping costs associated with the purchase.
• Section 179: For your business, the Section 179 deduction is one of the most essential tax codes you need to be familiar with. It lets you deduct all or part of the cost of the equipment purchased or financed and put into place before Dec. 31, 2022.

There is an annual dollar limit on what you can deduct. You have to be profitable to use the deduction, and you need to elect it; it’s not automatic.

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About the author: Cynthia McNerney is a tax manager at Whittlesey and licensed CPA in the state of Connecticut. She has a tax practice specialization with closely held businesses, nonprofit organizations, and high-net-worth individuals.