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What Is Year-End Tax Planning?

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  • Written By: K.C. Bruning
  • Edited By: John Allen
  • Last Modified Date: 15 November 2016
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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 that they are conducted in the best time frame. Deferring action or ensuring a certain activity happens before the end of the year can have a significant effect on the tax bill. There are several internal and external factors which can affect year-end tax planning as well.

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

Some of the most common issues considered during year-end tax planning are when to sell or buy assets. An individual may defer income from the sale of stocks, distributions from IRA accounts, and even employee bonuses. If it is more beneficial to report this income for the current year, the reverse action can be taken. It can also be helpful to convert investments such as IRAs and 401ks to accounts with a more beneficial tax structure.

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Year-end tax planning also typically includes the management of 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 IRAs is another common method of increasing deductions.

Effective 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 decreases the tax bill for the current year may have a stronger negative effect the next year.

Another common aspect of year-end tax planning is to determine if it is more beneficial to take standardized or itemized deductions. In some cases itemizing can lower the tax bill. It can bring to light deductions, gains, and other elements which it may be wise to allocate to another year.

Year-end tax planning often also includes the optimization of all available tax benefits. This can include accounting for advantages such as being a student, having a new child, and engaging in an activity that may have a new tax benefit that year. It also encompasses employer tax benefits such as flexible spending accounts.

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