Your Year End Action Plan

An Introduction

It’s the fourth quarter. The clock is ticking, and you have a few more minutes to make your biggest and best moves to win the game. This is a sports analogy bestie. Winning the game means maximizing your tax savings. And I want you to game plan because most folks call the wrong plays. You with me?

Yes? Beautiful. I’m the coach. You’re the quarterback, or whatever. So I’m going to give your some maneuvers, and you’re going to implement, or, you know, consult your own tax pro. 

To Spend or Not to Spend

That is the magic question here. I hear it every year. I see it on social. “I gotta blow all my money so I can pay less in taxes.” Of course people don’t really phrase it that way, but that’s what they mean. But that probably doesn’t make sense, friend. Let me explain why.

Assume you’re in the 20% tax bracket. This means 20% of all your income goes to taxes until you hit a higher bracket or deduct enough to go into a lower tax bracket. Assume you earn, after all other business expenses and such, $100,000. Your tax is 20%, or $20,000. Easy. Now, you think, should I spend $5,000 in December to get that tax deduction before the new year.

Well let’s break it down. Your taxable income is now $95,000 right? $100,000 minus $5,000 is $95,000. Assume you are still at a 20% tax rate. 20% of $95,000 is $19,000. You end up owing $1,000 less in tax.

You spend $5,000 to save $1,000. A 20% savings. You’re in the 20% bracket, so the deduction saves your 20%. Math is fun!

Ok, so do we want to save $1,000? Of course. Is it a good financial decision? It depends. First you should consider whether the thing was a good business investment, if this is a business deduction. Otherwise, you just wasted $4,000. To determine if it’s a good tax decision, we have to dig deeper.

Consider Your Tax Rate & Rate Changes

Consider your business journey. Are you in a growth mode? Also consider your other income sources. Do you plan to leave a full-time job next year, in which case, you’ll end up earning less. Do you have a spouse expecting a promotion, or is your business going to double in revenue, in which case you would earn more?

These things all affect your tax bracket. 

If you’re in the 20% bracket now but plan to be in the 30% bracket next year, does it make more sense to spend in December or January? The higher your bracket the more you save with each tax deduction. If you expect an increase in income, spending in December isn’t the move.

You must also consider changes to our tax brackets. Congress likes to make changes. Many are set several years in advance. For example, your income could stay the same, but the bracket could change from 20% to 22%, or it could decrease, which may make more sense with inflation adjustments. 

More of an Audio Person?

Tune into the podcast where I break down this same topic.


Revisit Your Quarterly Tax Payments

Most of us need to be paying quarterly taxes. For more on that, check out this blog post. Your quarterlies can also play into whether you should be spending for your business. Here we have two main considerations.

On one hand, if we haven’t paid quarterlies, it might make sense to spend. We pay interest and penalties when we pay late. If we get more deductions, we have less taxable income, which means a lower tax balance, which means less in penalties and interest.

BUT, spending money on deductions also means you have less money on hand to actually pay that tax. Be careful. I’ve had clients come to me in April and say “well I had $10,000 saved in December so I spent it all on business stuff.”

And I’m like “Great, that saved you $2,000 in taxes, but now you have a tax bill of $8,000 with $0 in the bank.” That move helped no one.

Weigh these two considerations with the ones I noted above. If you expect your tax bracket to be similar next year, and you have $10,000 in business savings, and you expect your tax bill to be $5,000, and you haven’t made tax payments, your best move might be to spend $5,000. That’s a lot of “ands” and “ifs.” Ultimately, you gotta crunch the numbers.

Another quick note, if there’s not a business expense that would produce a clear and quick ROI, consider putting the money into a deductible retirement plan instead. More on that below.

Look Into Tax Benefit Phase Outs

Many tax benefits are only available to folks below certain income thresholds. The wealthy have all sorts of creative ways to avoid tax. Sometimes, our elected officials throw the rest of us a bone.

Long-Term Capital Gains

A capital gain in layman's terms is a profit from the sale of an investment as opposed to income from working, having a business, etc. Think stock sales, crypto, proceeds from a home, and the like. A long-term capital gain is one that you hold for a year or longer. Short term gains are taxed at our normal tax bracket rates. Long-term gains get special tax treatment. Here’s a bracket I snatched from Nerd Wallet.

For example, if you’re single and have taxable income of $40,000, and you sell a stock you had for two years at a $2,000 gain, that gain would be taxed at 0%. Love that for you. If your taxable income was $42,000, now you pay 15% tax, which would be $300. Not a huge amount.

But what if you had a $20,000 gain? Now we’re talking about a $3,000 tax, in which case, it’d make sense to get your taxable income below that $41,676 threshold to save $3,000. 

Also, consider if you plan to sell any investments in the following year. If you happen to have a big thing you plan to sell in January, and you expect to be into a capital gains bracket that year, it’d make sense to see in December instead. Of course, you need to balance the market situation with the tax savings.

Additional Phase Out Rules

Next year I may circle back and properly finish writing this blog post, but for now ya girl is tired and has a lot of the other stuff on the to do list, so meanwhile, checkout this pretty thorough blog post from Investopedia.

Get That Retirement Rolling

Fun fact. You can contribute funds into your retirement account up until tax day for retroactive tax savings, but, but, but, you must have opened that account in the tax year in which you hope to take the deductions.

Here’s a tax strategy I like to use for context. You open your self-employed retirement account in December. Party. You’re not sure if you should contribute to it because you’re not sure if you have enough saved for taxes. Not a problem.

You prep your tax return in March, but don’t submit it yet. It looks like you owe $2,000. You have $6,000 saved. You then put $4,000ish into that retirement account. Now, depending on the type of account you have, your tax balance goes down. You submit the return. You pay the tax balance. You get all the all the benefits without having to do guesswork at the end of the year.

Now, if you’ve been reading closely, you may think “well isn’t this like all the other spending stuff where it might make more sense to get the deduction in the new year?” Maybe, maybe not. The most popular retirement plans have contribution limits. Ideally, you want to max your plan, so you’d put as much in for the previous year as you can while planning on maxing it out in the following tax year.

For more on the limits and retirement plan options, give this blog a read.

Utilize Your Annual Gift Exclusion

When I got my master’s in tax law, I took three gift & estate tax classes. I have no idea why. It hasn’t proved useful for 5 years, until writing this paragraph that is. Yay for me. Under current law passed by President Trump, we can now gift over $11 million during during or after our lives exempt from tax. I wonder why he’d love that. Hmm. 

However, there’s another consideration. In addition to the $11 million, you can also gift up to $15,000 per person ($28,000 for a married couple) per year. But why should us poors care if we’re never going to give $11 million. Staying under the $15,000 means we don’t have to mess around with filing gift tax returns. 

Here’s a fun example of when we would use something like this. My granny told me about this. When I was three, we moved into the house my grandpa built. He and granny downsized. My parents bought it for half the fair market value. The other half was a gift. Granny and gramps then gave the cash for the one-half to my uncle. It was an inheritance advance for both mom and her brother. They worked it out with the bank to give half the funds in December and half in January. 

I’m embellishing and summarizing this story for simplicity. I don’t know what the actual logistics were. I just want you to vaguely know about this annual exclusion deal so that if you have some big financial moves to make with friends or family, you can budget in the time to consult a professional.


Prep for Tax Season

Ugh, tax season. I gotta think about that already. I know, but yes. Here’s what you want to do.

Get a Head Start on 1099s

If you need to send 1099s (please see this blog post) get a head start on collecting your W-9s now. At least make a list of all the folks you need to gather info from so you can do it the first week of January.

Wrap up Your Bookkeeping

Bestie, level with me for a second. How’s your bookkeeping going? Are you a wait-until-March type of person? We don’t want to do that. (A) That’s stressful. (B) How can you do annual planning if you don’t have the numbers you need?

So finish those books.

Consider a Late S Corp Election

Typically, you must file for S Corp tax status in the beginning of the year or soon after forming your underlying business entity, the LLC or corporation.

However, there are ways you can file an S Corp late.

Give this blog a read for more on S Corps. In the coming months, I hope to update that post or this one with more info on how to do the late election. Stay tuned.

Get Started on a New Entity

If the new year is your ideal time to form your LLC or S Corp, like many folks, consider getting started now so it's ready for January 1st.

But, don't do it too see. Give this blog a read.


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