How to Reduce Taxes With Year End Strategies

If you find yourself near the end of the year with a high tax bill, then you need to take some additional action. There are tax strategies that you can use to reduce the amount that you owe the government. Find out if you can qualify for these by following these steps.

Instructions

Difficulty: Moderate

1. Calculate whether you anticipate your income will be higher the following year or lower. Try to get as many deductions for the highest year. The tax base is incremental, meaning it increases in percentage the more income you make. Taking a deduction in a 20 percent year makes no sense if you can wait and get it on a 33 percent year.
2. Pay a bill for any deductible item before the end of the year if this year's taxes need to have the additional reduction. If you believe that your income will be higher in the following year, wait until January 1st to pay it.
3. Invest in an IRA. The money that goes into an IRA is immediately reduced from your income if you qualify. Some income qualifications apply if you are already in a pension or 401K at work. You may also be able to arrange with your employer a change for the final weeks 401K deposits, either to be higher, if you need the deduction, or lower, if you need it for the following year.
4. Sell off losers. If you have a lot of long term capital gain or short term capital gain that you need to offset, find a stock or mutual fund, that matches, but has lost money. You cannot offset long term capital gain (held over 12 months) with short term.
5. Hold up in selling stocks or mutual funds that have been in your portfolio for not quite a year. While it's important to take a profit and run, sometimes a day or two can make a big difference in the amount of tax you pay. If you are just days away from the year cut off to change a short term gain to a long term, wait.
6. Plan distributions from a retirement account. If you just retired and don't need any funds for this year, plan to take the distribution in the following year, when your income will be lower.
7. Deduct a hobby. If you have a hobby that could brought a small income in, start using it as a business. You may have had considerable losses to offset that income. File it as a small business and they will offset your other income.