Contributed by: Henry, FreeTaxUSA Agent, Tax Pro
As the end of the year approaches, it’s a good time to consider your taxes and see if there are any steps you can still take before December 31. A few simple year-end moves may help you reduce your tax bill, avoid surprises when you file, and start the new year feeling more prepared. The following tips can help you make the most of the time left in the tax year.
Make address and name changes
If you have a new address, remember to notify your employer and the United States Postal Service of the change. You may also want to file Form 8822 with the IRS to update your address in their system. That way, any tax-related mail will reach you at the right place when filing season arrives. If you don’t file Form 8822, you can generally just use your new address on your next tax return, and the IRS will update their records when they process the return.
If you changed your name because of marriage, divorce, or another reason, it’s a good idea to report the change to the Social Security Administration (SSA) as soon as possible. The IRS checks the last name and SSN on your tax return against SSA records. If the SSA hasn’t processed your update yet, your e-filed return may be rejected. It usually takes the SSA a few weeks to process a name change after they receive the required documents, so getting an early start can help you avoid delays at tax time.
Estimate your tax liability
Consider any life changes that happened during the year, such as marriage, divorce, a new baby, a child aging out as a dependent, selling a home, starting a side business, or retiring. These events can affect your tax situation, and knowing what to expect can give you time to make adjustments before year-end. If it looks like you’ll have a balance due, you may be able to:
- Adjust your withholding: If not enough tax is being withheld from your paycheck or other income, you may be able to increase it before year-end. Withholding is generally treated as paid evenly throughout the year, even if a larger portion is withheld later in the year. This means increasing withholding late in the year can still help cover earlier tax liability.
- Make an estimated tax payment: If you’re self-employed, have income with no tax withholding, or haven’t had enough tax withheld, an estimated payment can help cover the tax due. The IRS generally expects estimated payments in four installments during the year, and the payment for income earned September 1-December 31 is due by January 15 of the following year.
- Take other steps to reduce the amount owed: You may still have time to make retirement or HSA contributions, contact your broker about tax-loss harvesting strategies, or schedule deductible expenses, as discussed later in this article.
Using these strategies to get closer to paying the correct amount of tax during the year may help you avoid underpayment penalties when you file your tax return.
Max out retirement or HSA contributions
Consider contributing to an IRA, HSA, or workplace retirement plan if you’re eligible. These accounts can offer tax advantages that help your savings grow faster. If your employer offers a match, try to contribute at least enough to get the full match. Otherwise, you may be leaving free money on the table.
In addition to helping you save for the future, these contributions may lower your taxable income and help you qualify for certain credits and deductions.
Harvest investment losses
Do you have investments that have gone down in value? If so, selling them at a loss may help offset capital gains from other investments you sold at a profit during the year. While it’s possible the declining investments could recover later, sometimes the tax savings from realizing a loss now may be more valuable than waiting for a future gain.
One thing to keep in mind is the wash sale rules. If you sell a stock at a loss and buy substantially identical stock within 30 days before or after the sale, you can’t claim the loss just yet. Be sure to consider these rules if you’re planning to take advantage of loss harvesting.
If you harvest losses that exceed your capital gains, you may be able to use up to $3,000 (or $1,500 if married filing separately) of the excess loss to offset other income. Any remaining loss can be carried forward from year to year until it’s used up.
Schedule deductible expenses
If you plan to itemize instead of taking the standard deduction, timing certain expenses can help you maximize your tax benefit.
One common strategy is called bunching, which involves concentrating deductible expenses into one year while keeping them lower the next year. In a high-deduction year, you try to pay as many deductible expenses as possible using the tactics described below, so your itemized deductions exceed the standard deduction. In a low-deduction year, you hold off on deductible expenses and claim the standard deduction, since you receive the full standard deduction regardless of how much you actually spend. Year-end planning in a low-deduction year often focuses on deferring expenses into the following year, when they may be more valuable.
Here are a few deductions you may be able to accelerate:
- State and local income taxes or property taxes: You might be able to pay a property tax bill early or make an estimated state tax payment before year-end, if it makes sense for your situation and you stay within the rules. For property taxes, the tax must already have been assessed, and your local government must allow you to pay it before the normal due date. You generally can’t deduct a payment for a future property tax bill that hasn’t been assessed yet, or an escrow deposit to your lender that hasn’t yet been paid to the taxing authority.
- Medical expenses: These are generally deductible only to the extent they exceed a percentage of your AGI, so if you’ve already met your insurance deductible and have other eligible expenses coming up, it may make sense to time additional medical care or payments so more expenses fall into the same tax year. You might consider scheduling and paying for dental work, eye exams or glasses, prescriptions, and elective procedures.
- Mortgage interest: The IRS allows you to deduct interest that has actually accrued and been paid during the calendar year. This means you may be able to make next year’s January mortgage payment in late December – as long as it posts to your mortgage before December 31 – allowing you to deduct the interest on this year’s return. Since the January payment typically covers interest that accrued during December, it’s generally eligible for this year’s tax accounting. However, you can’t prepay additional future interest and deduct it early.
- Charitable contributions: You may be able to donate before year-end and claim a deduction. Your deduction depends on whether the gift was made to a qualified charity, what type of property you donated, and how the IRS AGI limits apply to your situation. For more details, refer to IRS Publication 526.
- For most taxpayers, charitable contributions are the easiest deduction to bunch. If you typically donate a set amount to charity each year, you can simply choose not to donate in a low-deduction year and make a double donation in a high-deduction year.
- Starting in tax year 2026, non-itemizers can also deduct up to $1,000 ($2,000 if married filing jointly) in cash donations to certain qualified organizations.
Check FSA balance
Flexible spending accounts (FSAs) require you to choose your contribution amount before the plan year begins, and any funds left in the account at the end of the year are generally forfeited. However, the IRS allows an FSA plan to offer either 1) a grace period of up to 2 ½ months after the end of the year or 2) a carryover of up to $660 in unused funds to the following plan year. Your employer isn’t required to offer either option, and if they do, they can choose only one. Review your plan details so you know which rules apply.
If you have a health FSA, see if your employer has adopted a grace period or a carryover. If not, be sure to use any funds before they expire.
Take required minimum distributions (RMDs)
Many retirement accounts are subject to required minimum distributions (RMDs), which are the minimum amounts you must withdraw each year once you reach a certain age. Beneficiaries of a retirement plan or IRA account may also need to take RMDs after the account owner’s death. If you’re subject to RMD rules, make sure you take the required amount by the deadline. If you’re unsure how the rules apply to your situation, consider contacting your retirement account custodian for guidance.
Organize records
Gather and keep all your tax records in one place, so filing is easier when the time comes. This includes receipts, tax forms, charitable donation records, medical bills, mortgage statements, and any other documents that support deductions or credits you may claim. Staying organized now can save time later and help you avoid scrambling for paperwork at tax time.
Conclusion
Year-end tax planning doesn’t have to be complicated, but a little preparation can go a long way. By following these tips, you may be able to lower your tax bill, avoid last-minute stress, and take full advantage of the tax benefits available to you.
One last tip: When it’s time to file, FreeTaxUSA can help you prepare and file your return with confidence. Best of all, federal tax return preparation is always free.