Financial Advisors: 12 Expenses Not To Take On Before the End of the Year
People looking for tax write-offs may find themselves trying to take on big expenses at the end of the year in time for tax prep season.
While there are plenty of legitimate expenses you should seek to write off, some may not really provide tax benefits. And in some cases, those tax benefits could be better deferred to the next year, so you might want to hold off.
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Finance experts explain what expenses you should not take on before the end of the year.
Also see eight smart year-end tax planning tips for better financial outcomes.
Luxury Purchases or Major Upgrades
Tempting as it might be, the end of the year isn’t the time for major discretionary spending, according to Justin Godur, a finance advisor and the founder of Capital Max.
“This period should be for reflection and preparation, not for splurging on luxury items or major home upgrades. Such expenses can severely disrupt your financial equilibrium, especially without adequate planning,” he said.
Typically, he said, these purchases lead to buyer’s remorse once the holiday euphoria fades and the reality of the new year’s financial obligations kicks in.
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Large Medical Expenses
While it’s true that you can write off medical expenses if they exceed 7.5% of your adjusted gross income, be careful of saving a large medical expense for the end of the year if you aren’t sure it meets that threshold, according to Christopher McGlynn, a CFP with Compacom.
By pushing them to the next year, you can group them together to maximize your deduction in a single year, he explained.
Charitable Contributions
If you have already reached the limit for charitable contributions, there’s not a strategic reason to make any more in the same year, McGlynn said. “I suggest postponing additional donations until next year. This can help maximize your deductions over multiple years.”
New Loans or Credit Lines
Initiating new loans or extending your credit lines can be a serious misstep before the end of the year, Godur warned. “As we close the year, it’s vital to maintain a strong credit position to benefit from lower interest rates and better terms in the upcoming year,” he said.
Additionally, the inquiry on your credit report and the potential increase in your debt-to-income ratio could complicate your financial strategy for the new year, particularly if you’re considering refinancing your home or taking on significant new investments, he said.
Home Office Improvements
Self-employed individuals who qualify for home and office improvements to save on taxes might not need the deduction every year. “You can postpone these expenses to the following year if they do not require the deduction this year,” McGlynn said.
Business Equipment
Business owners should also consider the timing of their equipment purchases for tax purposes. “If their business income is lower this year, delaying the purchases until next year is better. They might require more deductions next year,” McGlynn said.
Education Expenses
Individuals with children can take advantage of the American Opportunity Tax Credit or Lifetime Learning Credit, McGlynn said. “However, they must note that paying for the next semester’s tuition in the current year does not provide additional tax benefits, especially if they have maximized their credit for the year,” he said.
Expensive Memberships or Subscriptions
Hold off on starting costly gym memberships or luxury subscription services at this time of year, Godur suggested.
“Often, these are driven by a spur-of-the-moment inspiration rather than careful consideration. Evaluate your past usage of similar services before adding new expenses. It’s common for these costs to turn into nonessential drains on your monthly budget, particularly if they’re underutilized,” he said.
Investment Expenses
Investors should note that certain investment-related expenses, such as advisory fees, are not deductible under the Tax Cuts and Jobs Act. “Therefore, paying these expenses before the end of the year is not beneficial,” McGlynn said.
While a new president could make policy changes, that’s still to be seen.
Mortgage Interest
Mortgage interest write-offs can be significant for people who are itemizing their expenses. However, McGlynn said, “Prepaying your mortgage interest does not provide additional tax benefits if you are close to the standard deduction limit. You can defer the expense to next year and claim the deduction benefit.”
Miscellaneous Itemized Deductions
Business owners should note that expenses like unreimbursed employee expenses or tax preparation fees do not provide any tax benefit if paid before the end of the year because many miscellaneous itemized deductions have been eliminated under the Tax Cuts and Jobs Act, according to McGlynn.
Tax-Avoidance Investments
If you think a last-minute investment will help you reduce taxable income, Godur suggested holding off. “While tax planning is crucial, hasty investments can lead to poor asset allocation and suboptimal returns. Instead, consult with a tax advisor early to make thoughtful, well-planned decisions that align with your long-term financial goals,” he said.
Overall, it’s crucial to engage strategic financial planning at the beginning of each year to avoid having to make a bunch of late-stage expenditures.
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