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4 Reasons a Pre-Year-End Tax Checkup Is Vital

By Dan Caplinger - Oct 14, 2017 at 6:19AM

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Don't wait until the end of the year to start your tax prep.

Many people make the mistake of thinking about tax planning only twice a year: late December and early April. Leaving things until the last minute can cause you to miss out on some valuable tax-saving strategies that can reduce your IRS bill or boost the size of your refund. The following four things are especially important to keep in mind as you prepare for a pre-year-end tax checkup.

1. Documenting key tax breaks

Nearly everyone qualifies to take advantage of at least some valuable tax deductions and credits. Most of the time, taxpayers must be able to support taking a deduction or credit by providing documentary evidence. For instance, the IRS requires that a donor who makes a charitable gift of $250 or more to obtain and keep a written acknowledgment from the charity.

Taxpayers can expect to receive tax forms after the end of the year to support certain deductions, such as a statement of mortgage interest paid from a mortgage lender. However, the best practice is also to keep copies of your own financial statements documenting deductible payments like mortgage interest, real estate taxes, and qualified medical expenses. That way, you won't have to rush at the last minute to gather information -- or, worse still, not be able to claim a tax break at all.

Tax forms on top of money.

Image source: Getty Images.

2. Handling a change in family status

How you file your return depends on your family status as of the end of the tax year. If you've gotten married or divorced or had a child during the year, then your tax situation could end up being much different than in past years. Moreover, depending on when during the year a change in family status happened, things like tax withholding from your paycheck might not match up with what your actual tax bill will look like.

A pre-year-end tax checkup can give you the opportunity to make changes to tax withholding to reflect more accurately what you'll owe at the end of the year, avoiding the potential for penalties for underpaying taxes in some cases. If you're still in the process of a change in family status, then an advisor can help you work through the tax consequences to come up with a plan that best reflects your financial needs.

3. Understanding the consequences of a big taxable gain

After more than eight years of a bull market, many investors are facing the prospect of large capital gains if they sell stock positions. Managing capital gains is important, and doing so well before the end of the year creates opportunities that you can otherwise miss.

Tax-loss harvesting is a key strategy to look at this time of year, especially if you have a large capital gain. By selling positions on which you've suffered a loss, you can apply capital losses against capital gains, reducing your overall tax bill. Also, for those who are in the 10% or 15% tax brackets for ordinary income, taking full advantage of the 0% rate on long-term capital gains can sometimes make selling appreciated assets a good strategy to follow. Getting a head start on tax planning gives you a lot more time to consider the best way to manage your portfolio in a tax-smart way.

4. Benefiting from buying a home

Buying a home is a major financial step, and it can have big tax benefits. The deductibility of mortgage interest and real estate taxes is often what leads taxpayers to itemize their deductions for the first time.

Once you can save more by itemizing rather than taking the standard deduction, you'll need to track not only your home-related deductible items but also other potential deductions like charitable contributions, state and local income taxes, and medical expenses. That way, your home purchase will help you save the maximum possible in taxes.

It's not too early to save on your taxes

Tax planning in October isn't the first thing on most people's minds, but it's smart to take the time to do a tax checkup before the end of the year approaches. That way, you'll be in the best possible position to save as much as possible when you file your tax return early next year.

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