3 Methods for Year-End Tax Planning

How to make last-minute moves to maximize your tax return

Couple preparing tax returns at home with calculator and paperwork on living room floor


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Year-end tax planning is the practice of trying to avoid tax penalties and make the most of any possible tax deductions and credits you might qualify for. You can take these steps at any time during the year, but taxpayers can take some last-minute actions to tilt their tax situation in their favor.

These year-end strategies include withdrawing from or contributing to a retirement account to take advantage of tax-free withdrawals or reduce your Social Security taxes. You might be able to convert a traditional IRA to a Roth IRA to take advantage of a lower tax rate. You may want to trigger capital gains in a year when you qualify for a 0% tax rate, or harvest capital losses to offset gains you had earlier in the year.

The specific financial moves you choose to make will depend on your unique situation, but you won't discover these opportunities without doing some year-end tax planning. You can go about it in three ways.

Key Takeaways

  • Year-end tax planning involves taking steps in the current year to minimize your tax burden in the coming year.
  • A review of last year's tax return and comparing it to your current year's income and deductible expenses can help you determine your likely marginal tax bracket.
  • An online tax preparation program can be an inexpensive and relatively simple way to pin down areas in which you can make some changes.
  • The most surefire (but costliest) way to get your projections right is to consult a professional.

Use an Online Tax Prep Program

According to the Internal Revenue Service (IRS), 90% of all personal tax returns were filed electronically in 2021, the most recent year for which comprehensive statistics are available. Online tax preparation software has become the most popular way for individuals to file tax returns.

One of the major advantages of using online software is that it's simple and easy to access. The process will be even easier if you gather the information you need in advance of calculating your taxes and preparing your return. You should collect certain information before you get started:

  • Last year's tax return: Use this as a template to estimate what should be included in your current year's return.
  • Pay stubs: These will show your year-to-date income and retirement plan contributions.
  • Investment statements: Forms from brokerage firms will show interest, dividends, realized gains and losses, and unrealized gains and losses in any trading or investment accounts you have.
  • Miscellaneous information on expected income and deductions: These statements could include anything related to health care expenses, mortgage interest, an estimate of net income from self-employment, and information about any other tax-related transactions that occurred during the year.
  • The software will be updated with the latest tax regulations and changes.

  • You'll get accurate solutions as long as you input the correct information.

  • Software programs can prompt you to find credits or deductions you may not know about.

  • It can be cumbersome to gather all your tax documents and information.

  • You may need to use third-party resources to calculate more complicated situations, such as the taxation of Social Security benefits.

An online calculator can be a handy tool to help you get a rough estimate of your federal tax liability for the current year. It will help you estimate your deductions, exemptions, and tax credits. But again, you must have your information on hand so you can enter it into the relevant text fields on the calculator.

Use Last Year's Tax Return

An easy way to conduct year-end tax planning is to print last year's return and write in your estimate of this year's numbers in the margins. You can do a ballpark estimate by comparing this year's numbers to last year's. You can control how detailed you get by adding more or less information on each line entry. You can keep things simple by only updating the line items that differ significantly from the year before if you just need a rough estimate of your tax situation.

Do your calculations with the current numbers to estimate your taxable income, then see what tax bracket your top tier of income falls into.

  • It's a quick process.

  • It takes very little effort to arrive at an estimate with this strategy.

  • You may not be aware of changes to the tax code that could impact your calculations.

  • You must have your prior year's tax information on hand.

Look for any last-minute ways you can use available deductions to reduce your tax liability if it looks like you've landed in a higher tax bracket or otherwise have more tax liability than last year. Alternatively, you may decide to trigger a capital gain or otherwise increase your income if you have room in your tax bracket to realize more income.


Your tax rate is determined by your income bracket. This figure alone will affect all other calculations on your return. Marginal brackets tend to change yearly, so check the IRS website for the most recent figures.

Hire a Professional

You can ask a CPA or qualified financial advisor to run a year-end tax projection for you. This is the most expensive option, but it's also one of the simplest ways to get the best results. You're likely to get the most accurate information, as well as sensible recommendations about any options you have available to you to improve your tax situation.

  • A professional will know what questions to ask you to gather necessary information.

  • They'll offer specific advice for your exact situation, and they can help with complex issues.

  • You won't have to do any calculations yourself.

  • This is the most expensive option.

  • Most professionals charge an hourly rate, so the longer you spend getting it right, the more it will likely cost you.

You'll have to provide the advisor with an estimate of everything you think will impact your tax situation if you use this option. Then ask for advice about the types of retirement plans that you might want to contribute to, ways to increase your deductions, or if you should intentionally realize capital gains or losses.

Frequently Asked Questions (FAQs)

How do capital gains and losses work to increase or decrease income?

You have a capital gain if you sell an asset for more than your adjusted cost basis in it, which is how much you paid for it plus any costs you incurred in maintaining and selling it. You have a capital loss if you sell the asset for less than your adjusted basis. Gains add to your taxable income while losses subtract from it. Short-term gains and losses are those that result from assets you owned for one year or less, and they're taxable at your ordinary tax rate along with your other income.

What is a marginal tax rate or bracket?

Your marginal tax rate is that which is applied to your top dollar of income and any extra income earned in addition to that, up to the next tax bracket. That next highest tax bracket then becomes your marginal tax rate or bracket. You don't pay this rate on all your income, but only on the portion of it that falls into the parameters of that bracket. This is different from your effective tax rate, which is the percentage of your overall income that you pay in taxes.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Returns Filed, Taxes Collected & Refunds Issued."

  2. IRS. "Topic No. 409 Capital Gains and Losses."

  3. Center on Budget and Policy Priorities. "Policy Basics: Marginal and Average Tax Rates."

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