Don't Mess With Taxes

Photo by Alexas Fotos

2024 is almost over, with millions making plans to celebrate the calendar changed on New Year’s Eve.

But before you don your party hat and raise your glass to say goodbye to the old year and ring in 2025, you need to be aware of the tax importance of Dec. 31.

Actions on the final day of a year could affect your full 2024 tax bill. Here are five that could make a difference.

1. Getting married. If you say "I do" on 12/31, then the Internal Revenue Service considers you married for the whole year. That means when you file your tax return next year, it must be as married filing jointly or married filing separately.

I've heard way too many times from newlyweds who think that since they weren't married for the full year, each spouse can still file as individual taxpayers. Nope. The only filing statuses the IRS will accepted from legally married couples, even if they tied the knot on the last day of the year, is married filing jointly or married filing separately.

If taxes matter vis-à-vis your nuptials (and they did, but for other reasons, to the hubby and me lo those many years ago when wed), then postpone your vows for a few days.

2. Legally ending your marriage. The same full-year marital status rule holds true for couples who determine that they're better off apart. Your marital status on Dec. 31 still determines your tax status for the entire year.

Of course, it's not as easy to time a legal break from your partner as it is to reschedule a wedding. You're at the mercy of the court system and when a judge issues your final divorce decree. But if it happens late in the year, even on the last day of the year, then you are a single taxpayer again.

A quick filing status note here. If you have children and are the custodial parent, you'll be able to file as head of household. That's generally a more tax advantageous filing status than single, which is how the other parent/ex-spouse typically must file.

3. Adding to your family. Biology, nature, and just plain old luck, not the tax code, tend to be the major factors on when and how your family grows. But where you can plan, it might be tax advantageous to increase your family by year’s end.

But lots of expectant parents aren't thinking about taxes as the end of the year winds down. They hope their child will be born on Jan. 1, so they can collect the presents (and often cash awards) that accompany First Baby of the Year celebrations across the country.

The real rewards, however, are the tax benefits you can claim for the whole year if your bundle of joy is instead born on Dec. 31. The end-of-year arrival can be claimed as your dependent for the full preceding 364 days, 365 in Leap Years. And that means you get the Child Tax Credit and other child-related tax breaks for which you qualify for the full tax year.

It's the same if your new family member joins your brood via adoption. You can claim an adopted child as your dependent in the tax year that the adoption is legally finalized. If that's on Dec. 31, then it again covers the full year. That year also will factor into your claiming of the adoption tax credit and/or any employer-provided adoption benefits.

Family related taxes are like families themselves; they can be complicated. So if you have a question about what tax breaks apply to you and your child, any time of year, talk with a tax professional.

4. Donating to charities. Are your email and snail mail boxes as full as mine right now with pleas from nonprofits for donations? I swear I checked the “don't sell my information” box when I gave last year. Still, the unsolicited appeals from nonprofits keep coming.

There's a reason for the end-of-year avalanche of charitable donation requests. The organizations know that folks are doing some last-minute, back of the envelope tax calculations and have realized that itemizing and claiming tax deductible donations is the way to go next filing season.

But for the deductions to count this tax year, you must make them by Dec. 31.

The good news here is the donations must be made, not necessarily received by the charity, on that day. So if you mail a check dated Dec. 31, it counts, even if the check isn't cashed until January. Ditto for donations made via debit or credit cards, as long as the transaction shows up on your statement as being made by the last day of the year.

5. Changing end-of-year income arrival. Few of us will turn down money, but sometimes it’s a wise tax move to delay, if you can, taking payment.

The main reason for the delay? Pushing the payment into the new year means it won’t put you in a higher tax bracket this year. That’s why self-employed taxpayers, including myself, sometimes don’t bill for work done later in a tax year until Jan. 1.

Timing of billing is especially important now that so many transactions are completed electronically. If you invoice someone on Monday, Dec. 30, or even on New Year’s Eve, they can electronically pay you immediately. Such quick payment might work for the client’s books, but it’s added taxable income that you might not want this tax year.

Another factor as to when the money counts for tax purposes is when you, per the IRS’ assessment, constructively receive it. This, says the tax agency, is when an amount is credited to your account or made available to you without restriction.

More importantly, this means you do not need to have actual, personal possession of the funds. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it, even if you don't get it until much later.

And no, you cannot hold checks or postpone taking possession of a payment to push it into the subsequent tax year. You must report the income in the year the property is received or made available to you without restriction, i.e., constructively received.

What about that payment check dated Dec. 31, but which didn't arrive until Jan. 5? This is where things get tricky. As I noted in an earlier post on constructively received income, this is particularly problematic when the payer sends you a 1099 for the year the check was dated. If you find yourself in this situation, check out the post. Also talk with a tax pro.

And definitely discuss payment timing with that client so that you don't have to worry about a repeat of this situation next year.

Now that you know how important Dec. 31 — which also is this weekend’s final By the Numbers figure for 2024 — is when it comes to taxes, it’s time to get back to your New Year's Eve party planning.

You also might find these items of interest:

• 6 family-friendly tax credits
• Tax issues newlyweds need to consider
• 7 tax considerations for divorcing couples

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