It probably doesn’t occur to most people that the month of December is the last opportunity to lower their tax liability for the year. Even as the end of the year approaches, there is still time to review your financial situation and consider strategic moves to cut your tax bill and position yourself for a solid financial start in the new year.
Follow this year-end tax planning checklist to plan and implement key strategies to make the most of this critical planning window.
Maximize Retirement Contributions
Contributing to your retirement account is one of the most direct ways to reduce your taxable income.
- 401(k) contributions: To lower your taxable income, maximize your contributions. In 2024, the contribution limit is $23,000 for those under 50 and $30,500 for those 50 or older (including catch-up contributions).
- IRAs: Contributions to a traditional IRA may be tax-deductible, depending on your income and filing status. The maximum contribution limit is $7,500 (including a $1,000 catch-up for individuals 50+).
- Self-employed plans: If you’re self-employed, consider contributing to a SEP-IRA or Solo 401(k). These plans often allow higher contribution limits based on your income.
Consider Tax-Loss Harvesting
Tax-loss harvesting is a key tax reduction strategy involving selling investments at a loss to offset gains.
- Offset capital gains: If you’ve realized significant capital gains this year, offset them by selling underperforming stocks for a loss.
- Carryover losses: If your losses exceed your gains, you can deduct up to $3,000 ($1,500 if married, filing separately) against other income and carry forward unused losses to future years.
- Beware of the wash sale rule: Avoid repurchasing the same or a substantially similar investment within 30 days of the sale, as this can disqualify the offset.
Review Charitable Giving Strategies
Charitable contributions are a powerful way to reduce your adjusted gross income (AGI) while supporting causes you care about.
- Cash donations: Cash contributions to qualified charities are tax-deductible if you itemize. Keep detailed records and receipts for verification.
- Donating appreciated assets: Consider donating appreciated securities like stocks or mutual funds. This allows you to avoid capital gains taxes while deducting the asset’s full market value.
- Qualified charitable distribution (QCD): If you’re 70½ or older, you can donate up to $100,000 directly from your IRA to a charity. The amount counts toward your Required Minimum Distribution (RMD) and is excluded from your taxable income.
Optimize Your Tax Deductions
Since the standard deduction was increased in 2017 ($13,850 for individuals and $27,700 for joint filers in 2024), fewer people can itemize deductions. However, there are still ways to optimize your deductions strategically.
- Bunching deductions: If your itemized deductions fall short of the standard deduction threshold, consider “bunching” them into one year. For example, you could prepay medical expenses or property taxes in December to get you past the threshold.
- Home office deduction: If you’re self-employed and use part of your home exclusively for business, you may qualify for a home office deduction.
- State and local taxes (SALT): Keep in mind the $10,000 cap on SALT deductions when planning.
Take Advantage of Tax Credits
Tax credits are valuable because they can reduce your tax bill dollar for dollar, unlike tax deductions, which only lower your taxable income.
- Child tax credit: This credit provides up to $2,000 per qualifying child under 17, subject to income limits.
- Education credits: If you’re paying for higher education, explore the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC).
- Energy-Efficient Home Improvement Credit: If you’ve made eligible energy-efficient upgrades to your home, you may qualify for this credit.
Plan for Required Minimum Distributions
If you’re 73 or older (or inherited an IRA), you must take required minimum distributions (RMDs) from certain retirement accounts.
- Calculate accurately: Failing to withdraw the correct amount can result in a hefty penalty (25% of the shortfall in 2024).
- Strategize your timing: Taking your RMD early or late in the year can impact your taxable income and tax bracket.
- Consider a Roth conversion: If you’re in a lower tax bracket, converting some traditional IRA or 401(k) funds to a Roth IRA can reduce future RMDs and improve your after-tax cash flow in retirement.
Manage the Timing of Your Income
Timing when you receive your income can help keep you in a lower tax bracket or qualify for valuable tax credits.
- Defer income: If you’re self-employed or have control over when you receive income, consider deferring some income to the following year.
- Accelerate income: If you expect to be in a higher tax bracket next year, you could accelerate income into the current year.
- Accelerate deductions: If you expect to be in a higher tax bracket next year, you may want to accelerate deductible expenses into the current year. For example, you can prepay medical bills or property taxes.
- Be aware of phase-outs: Many tax credits and deductions phase out as income increases, so timing your income can help you stay within eligibility thresholds.
Review Health Savings Accounts (HSAs)
HSAs offer a trifecta of tax advantages: tax-deductible contributions, tax-free growth of earnings, and tax-free withdrawals for qualified expenses.
- Maximize contributions: The 2024 contribution limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those 55 or older.
- Fund future expenses: If you can afford it, contribute the maximum to your HSA and let the funds grow tax-free for future healthcare costs.
Evaluate Your Estate Planning
If you’re concerned about estate taxes or passing wealth to heirs, year-end is a good time to address these issues.
- Annual gift exclusion: You can give up to the annual gift tax exclusion of $17,000 per recipient in 2024 without incurring gift tax.
- Use your lifetime exemption: The federal estate tax exemption is $12.92 million per individual in 2024. Consider strategies like irrevocable trusts to reduce the taxable estate.
- Review beneficiary designations: Ensure that your beneficiary designations are current in your retirement accounts, insurance policies, and other financial accounts.
Check for Legislative Changes
Tax laws change frequently, so staying informed is crucial for effective planning.
- Secure Act 2.0: Secure Act 2.0 introduced various retirement planning updates, including changes to RMD age and catch-up contributions.
- State tax changes: Keep an eye on changes to state tax laws that may impact your planning.
- Sunsetting provisions: Many provisions from the Tax Cuts and Jobs Act (TCJA) are scheduled to expire after 2025, potentially increasing tax rates for individuals and businesses.
Work with a Professional
Tax planning can be complex. Working with a CPA, financial advisor, or tax attorney can help you maximize your strategies.
- Proactive planning: A tax professional can provide personalized advice based on your unique financial situation.
- Avoid costly mistakes: Ensure you comply with IRS rules to avoid penalties.
- Integrate financial goals: Collaborate with your financial advisor to align tax strategies with broader financial objectives.
Organize and Prepare for Filing
Preparing for tax season now can save you time and stress later.
- Gather documents: Collect W-2s, 1099s, and other income-related documents as soon as they are available toward the end of January.
- Track expenses: Gather and organize receipts and records for deductible expenses, such as medical bills, charitable donations, and business costs.
- Use technology: Consider using tax software or apps to organize your documents and track deductions.
Except for retirement contributions, which can be made with most plans until the tax filing deadline, once the clock strikes midnight on New Year’s Eve, your tax liability is locked in for the year. Although the planning window for managing your 2024 taxes is closing, you still have time to implement some key strategies to keep more of the money you earn and improve your financial health.
Bottom Line
Whether focusing on retirement contributions, charitable giving, or timing income and deductions, each step you take today can pay dividends in the new year. Consider working with a qualified tax professional or financial advisor for personalized advice and to ensure compliance with tax laws.
ARQ Wealth advisors understand the intricacies of the taxation process and are experienced in reviewing your financial situation and investment strategy to identify tax-saving opportunities.Call us at (480) 214-9572 or use our contact form.
