As summer winds down and the year comes to a close, now is the perfect time to get a head start on your taxes. Waiting until the last minute can lead to unnecessary stress—and possibly an unexpected tax bill. Here are the main things W-2 employees should look into in order to get ahead of the game:
1. Tax Projections & Withholdings
Taxes aren’t just a once-a-year task; tax planning is something you should be doing year-round. At this point in the year, it’s essential to review your quarterly tax payments and adjust them if necessary. Are you over-withholding or under-withholding? Checking now helps prevent any unwanted surprises when tax season rolls around. A great place to start is the calculator that the IRS provides Tax Withholding Estimator | Internal Revenue Service (irs.gov).
2. Retirement Accounts
Contributing to retirement accounts not only sets you up for a solid future, but it can also offer some nice tax breaks. Pre-tax contributions can lower your current taxable income. Consider contributing just enough to pre-tax accounts to drop into a lower tax bracket, and then funnel the rest into Roth or other tax-free accounts. Obviously, everyone's situation is different so work with a tax professional to make sure you are making the correct contributions!
3. Tax Loss Harvesting
If you’ve had any losses in your taxable investment accounts this year, now is the time to take advantage of tax loss harvesting. You can use those losses to offset capital gains or deduct up to $3,000 from your taxable income. If your losses exceed that, they carry over to future years. This strategy is particularly useful after a good year in the stock market when gains may be higher than expected.
4. Charitable Contributions
Thinking of giving back? Charitable donations not only make a positive impact, but they also come with tax benefits. In general, you can deduct up to 60% of your adjusted gross income (AGI) through charitable donations. However, limits may vary based on the type of contribution, ranging from 20% to 50% of your AGI. If you surpass the donation limit, you
can carry forward the excess for up to five years. Donor Advised Funds are a useful account to gift cash or investments like appreciated stock.
5. Deducting Medical Expenses
Have significant medical bills this year? You may be able to deduct unreimbursed medical expenses that exceed 7.5% of your AGI. Many people overlook this deduction, but it can provide substantial tax savings if you’ve had large healthcare costs. Just be sure to keep track of all receipts as well as itemize your deductions.
6. Cash Flow Check
Before year end, take a moment to review your cash flow. Did you make more money than last year? Spend more or less? Save more or less? Your cash flow is what drives your financial plan. If you have surplus cash, give it a purpose: invest, save, or pay down debt. Here are some smart places to allocate your extra cash:
Employer-sponsored retirement plans like 401(k)s or 403(b)s
High interest debt
IRAs (Roth or Traditional, depending on your tax situation)
Health Savings Accounts (HSAs) for tax-advantaged health savings
Taxable brokerage accounts for general investing
529 plans for future education savings
Final Thoughts
Year-end tax planning is all about being proactive. Nobody loves doing their taxes, trust me I'm aware. At WealthBound we work directly with our clients to plan year-round. Whether it’s adjusting your withholdings, contributing to the right retirement accounts, or making strategic charitable donations, we can help!