Should I Get a Year-End Tax Projection?

Tax time is looming on the horizon, but you don’t have to wait until those 1099s and W-2s become available early next year to begin planning. A year-end tax projection can help you take stock of the past year and identify ways to maximize your tax situation, retirement savings, charitable contributions, and more before the end of the year. 

I’m a fan of turning to tax professionals when it comes to these matters, because taxes can get complicated, especially for small business owners (no judgement if you don’t do your own taxes — neither do I!). So to help me explain year-end tax projections, I turned to Luis F. Rosa, CFP® EA, founder of Build a Better Financial Future. “By the time you sit down to do your taxes next year, you might have already missed out on certain opportunities,” Luis told me. “The time to do a projection is now before the calendar year ends.”

Why Might I Want a Year-End Tax Projection?

A year-end tax projection can be helpful if you’ve had any big life changes this year: you got married or divorced, had a baby, bought a house, inherited money, sold off an investment, got a raise, switched jobs, did freelance work, started a business…

If you’re in your 20s, 30s, or 40s, odds are at least one of those things happens to you every year! A projection can help you avoid surprises in April so you know you have the savings on hand to pay a large tax bill. Or even better, you can find ways to reduce that tax bill in the first place.

Here are other adjustments you may identify by doing a year-end tax projection:

Paycheck withholdings: Are you withholding enough taxes from your paychecks? If it turns out you’ll owe money, you can adjust your withholdings for the last few paychecks of the year to soften the blow.

Retirement savings: Will your income exceed the limits for contributing to a Roth IRA? Can you max out your 401(k)? Did you earn less than usual this year, making it the ideal time for a Roth conversion?

Investments: If you sold off investments and owe capital gains tax, you may decide to offset some of those gains by selling some other investments at a loss. You can offset up to $3,000 per year in gains.

Itemizing vs. the standard deduction: “Year-end planning can also help you determine if you should ‘lump’ some of your deductions this year so that you can itemize and then take the standard deduction the year after, helping you take advantage of the tax code in your favor,” said Luis.

How Do I Get Started?

A year-end tax projection takes a little homework, but you’ll get peace of mind (and hopefully some savings) in return. You’ll need to gather:

• Last year’s tax return to use as a guide
• Your year-to-date pay stubs
• A list of itemized deductions like mortgage interest paid, property taxes, and charitable contributions
• A list of year-to-date contributions to retirement accounts
• Statements for investment and savings accounts to see if you’ve earned capital gains, dividends, or interest

You can use a calculator like this one to do your own projection, or turn to a CPA, enrolled agent, or financial planner for professional guidance. There’s a fee for using a pro, but they can help make the process easier and more thorough.

I know that the very idea of tax planning can be intimidating, but approaching it thoughtfully and proactively can help you maximize your personal situation and avoid ugly surprises in the spring.