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Year-End Checklist: 10 Simple Income Tax Tips

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December 23, 2015
Year-End Checklist: 10 Simple Income Tax Tips

Earlier this year, NerdWallet surveyed Americans and found that the average adult gets a 50%, a failing grade, on personal finance questions related to income tax. Sure the tax code is convoluted and April seems so far away, but consumers should seek out expert advice and learn as much as they can about tax basics and how financial products and decisions impact liability. With 2016 just around the corner, don't forget that there is still time to make some smart moves that will help you come tax time next year.

Here are 10 simple year-end income tax tips to help you organize your finances and set yourself up for the New Year:

  1. Make 401(k) contributions by the end of the year. Many people wonder what to do with their year-end bonuses or cash gifts from family. Using a portion of it to help max out retirement contributions for the year can be a great way to bolster investments or savings especially if you haven't been good at those regularly. For 2015, the limit was raised to $18,000. 
  2. Over the age of 50? Take advantage of catch-up contributions. In addition to the $18,000 401(k) maximum, any individual over age 50 by the end of the calendar year can make a $6,000 catch-up contribution to their 401(k). Check out the IRS website for contribution amounts. 
  3. Maxed out 401(k) contributions? Consider a traditional or a Roth IRA. While the deadline for last year's contributions is technically April 15, make contributions to an IRA throughout the 2015 tax year and take advantage of the tax benefits:
    - Federal-tax-free growth and tax-free withdrawals for Roth IRAs
    - The ability to deduct contributions on income taxes now and pay the taxes upon qualified withdrawals in retirement with traditional IRAs.  
    Note: AGI limits apply for deductibility for both Roth and traditional IRAs.
  4. Invest in a child's future. Consider opening and/or investing in a 529 account, Coverdell or custodial account. Some 529s have tax benefits depending on the state of residence. And parents can take advantage of the American Opportunity College Credit if they are currently paying their child's college tuition. (Note: AGI limits apply). And a new account or contribution to an existing account, even a small one, can be a great gift alternative for young ones. 
  5. Pay down high-interest debt. Doing so can save money in the long run. The annual interest rates on some credit cards can be as high as 19 percent. If only the minimum amount is paid each month, a seemingly small purchase could take months to pay off and over time could cost significantly more in interest.
  6. Donate to charity and write it off. 'Tis the season of giving back, after all. 
  7. Adjust your W9 and pay yourself instead of Uncle Sam. For 2014, the average tax refund was slightly more than $3,000. Rather than loaning Uncle Sam that money, consider adjusting withholdings to invest the extra money throughout the year.
  8. Rebalance your portfolio; take into consideration if anything has changed -- i.e. time horizon, objectives, risk tolerance, etc. Some investors will sell some winners and reallocate cash, others will take some losses for tax purposes. While these moves may or may not be right for you, and will certainly have tax consequences, consider the implications of the tax year on your portfolio. 
  9. Save for a rainy day. Use that bonus to get a head start on an emergency fund. Many financial commentators, advisors, and others in the personal finance world say it's a good idea to have six to nine months' worth of expenses set aside for unforeseen emergencies.
  10. Review all contributions and portfolio allocations as well as beneficiary designations to help start off 2016 on the right financial foot.

Whether you take one of these steps or all of them, the most important thing you can do now is plan. Plenty of questions can accompany tax season, given the complex factors at work. Taking time to understand your financial situation, tax liability and any federal or state changes can help simplify the process and ensure you meet the April deadline. After all, it's not so far off.

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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