The year-end countdown is on—are you ready to make the most of your taxes? While many taxpayers wait until tax season to evaluate their financial situation, tax planning is a year-round activity. Many valuable tax-saving opportunities require action before December 31st, so waiting until April will be too late.
In this blog, we’ll explore essential tax strategies you can implement now to lower your taxable income, boost your savings, maximize deductions, and ensure you’re fully prepared when tax season rolls around. Whether you’re looking to save on this year’s taxes, set yourself up for a better financial future, or both, these strategies can make a meaningful impact.
Why Year-End Tax Planning is Crucial
Year-end tax planning is a critical part of the financial planning process. Even though Tax Day may seem light years away, many tax strategies are time-sensitive, requiring action before December 31st to affect the current year’s tax return. For example, you must take your required minimum distributions (RMDs) by year-end to avoid costly penalties.
Proactive planning allows you to review and adjust your financial situation now, preventing stress during tax season and giving you time to make informed decisions. While Tax Day may be months away, you can do plenty now to manage and lower your 2024 tax bill. Here are seven critical tax-planning strategies to reduce taxable income, maximize deductions, and take advantage of tax-saving opportunities before year-end.
1. Review and Maximize Retirement Contributions
The best place to start is by reviewing your retirement contributions. You can reduce your taxable income and tax liability by maxing out your retirement contributions. You may have multiple tax-deferred accounts, including:
- 401(k): Max out contributions to your employer-sponsored 401(k). The 2024 limit is $23,000, or $30,500 if you’re over 50 with catch-up contributions. These contributions reduce taxable income.
- IRA: Traditional IRA contributions (up to $7,000, or $8,000 if over 50) can also be tax-deductible.
IRA contributions can be made until April 15th, but 401(k) contributions must be completed by December 31st.
If you anticipate higher future tax rates, a Roth conversion may be the right tax-planning move. It allows you to convert a Traditional IRA, 401(k), or other retirement account to a Roth IRA, paying taxes now but enjoying tax-free growth and withdrawals later. Roth Conversions are also a great way to lower Required Minimum Distributions in the future, and there are no age limits so that you can convert your retirement savings at any age.
Important deadline: Conversions must be completed by December 31st of the calendar year.
2. Harvest Tax Losses
A capital gain refers to selling something, such as a stock, for more than you paid. At first, you may be excited about making a profit, but unfortunately, the government charges you for profits via a capital gains tax. That’s why it’s important to balance short-term and long-term gains.
Short-Term vs. Long-Term Gains: Short-term gains (assets held under a year) are taxed as ordinary income, while long-term gains receive favorable tax rates. Assess your portfolio and consider holding onto investments to qualify for long-term rates.
The key is to balance gains and losses. If you’ve realized significant gains in one area of your portfolio, you can reduce your taxable income by selling assets at a loss to offset them. This strategy is called tax-loss harvesting, allowing you to sell underperforming investments at a loss to offset capital gains, reducing your overall tax liability.
If you’ve realized significant gains, tax-loss harvesting can balance them out, potentially offsetting up to $3,000 in ordinary income. Excess losses can also be carried forward to future years.
However, watch out for the wash sale rule. The wash sale rule comes into play if you repurchase the same or substantially identical security within 30 days before or after the sale. “If you do so, the IRS won’t allow you to claim the loss for tax purposes. Instead, the loss is added to the cost basis of the new investment, delaying any tax benefit until you sell it in the future.
3. Maximize Charitable Contributions
If charitable giving is one of your financial goals, it’s important to make your donations as tax-efficient as possible.
Cash donations to qualified charities are tax-deductible for up to 60% of your adjusted gross income (AGI), but you must itemize your deductions to claim them. To further enhance tax efficiency, consider donating appreciated stock instead of cash. This approach allows you to avoid capital gains taxes while maximizing your deduction.
Not sure where to give before year-end? A Donor-Advised Fund (DAF) lets you take the deduction now while giving you time to decide which charities to support later.
If you’re 70 ½ or older, you can make a tax-free donation of up to $105,000 directly from your IRA to a qualified charity through a Qualified Charitable Distribution (QCD). This donation can also count toward satisfying your Required Minimum Distribution (RMD).
4. Defer Income or Accelerate Deductions
Deferring income or accelerating deductions before the year ends can be effective strategies for lowering taxable income, optimizing taxes, and capitalizing on timing-based deductions.
- Deferring Income: If you expect a high income this year but anticipate a lower income next year, deferring income (like a year-end bonus) to January can reduce your current year’s taxable income. Also, by deferring income, you can keep your income within a range that lets you qualify for these valuable tax benefits, like the Child Tax Credit or education credits, that may not be available at higher incomes.
- Accelerating Deductions: Prepaying certain expenses, like mortgage interest, state and local taxes, or medical bills, allows you to claim them this year. If you’re self-employed, you can accelerate business expenses to maximize deductions. For those who itemize deductions, accelerating deductions can be beneficial if they expect their income (and possibly their tax bracket) to be higher this year than next.
5. Check Your Health Savings Account (HSA) Contributions and Flexible Spending Account (FSA)
Year-end tax planning isn’t complete without reviewing your HSA contributions and FSA balance.
HSAs are famous for their triple tax benefits, meaning that contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. For 2024, the limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up for those 55 and older.
Important deadline: HSA contributions must be made by December 31st to count for this tax year.
If you have funds in your FSA, now is the time to use them! FSAs have a “use-it-or-lose-it” rule, meaning funds must be used by year-end or forfeited. You can use FSA funds for qualified medical expenses such as dental cleanings, contact lenses, or allergy medicine.
PSA for your FSA: Read the fine print. Your FSA plan may offer a carryover or grace period and plan qualified spending accordingly.
6. Work With A Financial Advisor
These 6 year-end tax planning strategies can help you minimize your tax liability and take advantage of available credits and deductions before December 31st. Consult with a tax professional or financial advisor to personalize these strategies to fit your financial goals and unique tax situation.