Year-end tax planning: what is it?

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Year-end tax planning involves managing finances for the best annual tax benefit, including timing sales, purchases, and deductions. External factors like government tax changes can also impact planning. Actions like deferring income and managing deductions are common, and it’s important to consider both short and long-term effects. Optimizing available tax benefits is also crucial.

Year-end tax planning is the process of managing financial matters for the best annual tax benefit. This typically includes timing certain sales, purchases or changes so they are conducted in the best amount of time. Deferring an action or ensuring that a certain activity occurs before the end of the year can have a significant effect on your tax bill. There are several internal and external factors that can affect your year-end tax planning as well.

Usually the most significant external factor in year-end tax planning is any changes to taxes made by the government. Typical actions include changes to rates and potential credits due to new government action. These actions can have a significant effect on how people manage their finances in anticipation of the tax period.

Some of the more common issues considered during year-end tax planning are when to sell or buy assets. An individual can defer income from stock sales, distributions from IRA accounts, and even employee bonuses. If it is more advantageous to carry over this income for the current year, the reverse action can be taken. It can also be helpful to convert investments like IRAs and 401k’s into accounts with a more advantageous tax structure.

Year-end tax planning typically also includes managing deductions. This can include the timing of charitable donations, property tax payments, and the sale of investments that are losing money. Increasing contributions to retirement accounts such as an IRA is another common method of increasing deductions.

Actual year-end tax planning includes consideration of both the current and future years. It is advisable to determine the effect an action would have in both the short and long term. A sale or deferral that reduces the tax for the current year can have a stronger negative effect the following year.

Another common aspect of year-end tax planning is determining whether it’s more beneficial to take standardized or itemized deductions. In some cases, breaking it down into detail can reduce your tax bill. It can unearth deductions, earnings, and other items that might be wise to put aside for another year.

Year-end tax planning also often includes optimizing all available tax benefits. This may include accounting for benefits such as being a student, having a new child, and engaging in a business that may have a new tax benefit that year. It also includes employer tax benefits such as flexible spending accounts.

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