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Maximize Your Tax Savings by Year-End

Benjamin Franklin once said, “. . . in this world nothing can be said to be certain, except death and taxes.” While there is not much we can do to about the former, there are steps we can all take to help minimize and reduce tax liability before the end of each year.

In the United States, personal income taxes are calculated on an annual basis from January 1st through December 31st of the same calendar year.  The deadline for filing a personal income tax return in April 15th of the following year.  What you do within a given tax year will impact how you are taxed for that year. There are three basic areas to look at when determining how to maximize tax savings:

Accelerate or Defer Income
First, look at whether you should accelerate income into the current year or defer income into the following year. Depending on the type of work you do, you may be able to accelerate income into the current year. Accelerating your billing, or advance billing to clients, or having bonus payments made before the end of the year will add that income to the current year. However, if it is in your best interest to reduce your current year income, you can delay billing until after the end of the year, or have bonus payments made after the end of the year.
 
Accelerate or Defer Expenses
Second, you may be able to accelerate or defer expenses in order to take advantage of those expenses as deductions or tax credits. Along the same lines as income acceleration and deferral, your ability to make these types of tax moves will depend on what type of work you are in, as well as the type of expenses you are dealing with. The following are examples of accelerating expenses: 

  • increasing charitable donations
  • prepaying medical bills
  • realizing an investment loss
  • increasing savings and retirement plan contributions

Conversely, of each of those examples can be applied to defer your expenses as well. Additionally, contributing to a Roth IRA (which requires contribution to be made with money that has already been taxed) will allow you to forgo a deduction during the contribution year in exchange for the benefit of tax free investment return.

Be Aware of Tax Changes
Third, understand what changes are coming for the following year. Each year the federal government makes adjustments to the tax code. Occasionally, those changes can have an impact on your tax planning. Adding or removing potential deductions or changing limits to deductions can have an impact on your tax planning. These changes will typically be finalized well before the end of the tax year, allowing you time to make adjustments to your tax strategy.
 
Paying your taxes is never a fun activity.  Consult  your tax advisor about how the rules may affect your situation. Also keep in mind that tax preparation is free in Online Banking. Just click on "My TurboTax" and follow the simple, step-by-step instructions. If you're not an Online Banking user, enroll here. Learn more about our Traditional or Roth IRA programs..

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