As the year draws to a close, small actions can lead to significant financial benefits, especially when it comes to managing your tax liability. By implementing strategic tax-saving moves, you can position yourself to minimize your taxes and optimize your financial situation. Below are actionable insights and strategies to help you wrap up 2024 on a strong financial note.
1. Maximize Itemized Deductions and Manage Medical Expenses
For those who itemize deductions, there’s an opportunity to reduce taxable income by addressing outstanding medical bills. If your total medical expenses exceed 7.5% of your adjusted gross income (AGI), you can claim them as deductions.
Even if you lack immediate cash, using a credit card to settle medical bills before year-end qualifies those expenses for the current tax year. This strategy is especially useful for individuals with significant healthcare costs incurred during the year.
2. Prepay Property Taxes (With Caution)
Prepaying your property taxes for the second installment can increase your itemized deductions. However, remember the $10,000 cap on state and local tax (SALT) deductions, which includes property taxes. If you’re already nearing this limit, prepaying might not yield additional benefits. Always assess whether this move aligns with your financial goals.
3. Boost Charitable Contributions with Bunching Deductions
Charitable giving remains one of the most effective ways to lower taxable income while supporting meaningful causes. If your annual deductions hover near the standard deduction threshold, consider bunching your deductions—consolidating multiple years’ worth of charitable contributions into one year.
By exceeding the standard deduction in one year, you can itemize, while taking the standard deduction in alternate years, maximizing your overall tax benefits.
4. Meet Required Minimum Distributions (RMDs)
If you’re 73 years or older, the IRS mandates you take RMDs from retirement accounts by December 31, 2024, to avoid a 25% penalty. For those turning 73 this year, delaying the first RMD until April 1, 2025, is possible. However, this means taking two distributions in 2025, potentially increasing your tax burden for that year. Carefully evaluate your income levels in both years before deciding.
5. Qualified Charitable Distributions (QCDs) from IRAs
For individuals aged 70½ or older, QCDs allow you to transfer funds directly from an IRA to a qualified charity, up to $105,000 for 2024. While this amount doesn’t provide a direct deduction, it reduces your taxable income, potentially lowering taxes on Social Security benefits and improving eligibility for certain deductions and credits.
Ensure the transfer is completed by your IRA trustee before December 31 and secure acknowledgment receipts from charities for record-keeping.
6. Maximize Retirement Contributions
Take full advantage of retirement savings accounts. For 2024, you can contribute up to:
- $23,000 to a 401(k) ($30,500 with catch-up contributions for those 50+).
- $7,000 to an IRA ($8,000 with catch-up contributions for those 50+).
These contributions not only lower your taxable income but also grow tax-deferred, making them a powerful tool for long-term financial planning.
7. Harvest Tax Losses from Underperforming Investments
Tax loss harvesting allows you to sell underperforming stocks to offset capital gains. This strategy reduces your taxable income but requires careful planning to avoid the wash sale rule, which disallows a deduction if the same or substantially identical security is repurchased within 30 days.
8. Review Paycheck Withholdings and Estimated Taxes
Underpayment penalties can be costly. Review your paycheck withholdings and estimated tax payments to ensure adequate coverage. If you’ve under-withheld, increase withholdings or make an estimated tax payment before year-end. Withholdings are treated as paid evenly throughout the year, helping offset earlier underpayments.
9. Don’t Forget Health Accounts
- Flexible Spending Accounts (FSAs): Use remaining balances by year-end to avoid forfeiting unused funds. For 2024, up to $640 can carry into 2025 but must be spent by mid-March.
- Health Savings Accounts (HSAs): If you became eligible late in the year, you can still contribute a full year’s worth of deductions, provided the account was established by December.
10. Prepay Tuition to Maximize Education Credits
Prepaying tuition for academic periods beginning within the first three months of 2025 can maximize education credits like the American Opportunity Credit or Lifetime Learning Credit. This strategy is particularly useful for students just starting college.
11. Convert to a Roth IRA if Income is Low
If your income is unusually low this year, consider converting a traditional IRA to a Roth IRA. Lower income typically means a lower tax rate, making this the ideal time to convert. Additionally, market downturns provide an opportunity to convert assets with reduced tax implications.
12. Take Advantage of Zero Tax on Capital Gains
Taxpayers in lower income brackets may benefit from the 0% long-term capital gains rate. For 2024, this applies to taxable income below:
- $94,051 for married filing jointly.
- $63,001 for head of household.
- $47,026 for single filers.
Selling appreciated stocks and immediately repurchasing them resets their cost basis without incurring taxes, providing future tax savings.
13. Utilize the Annual Gift Tax Exemption
The annual gift tax exclusion allows individuals to give up to $18,000 per recipient in 2024 without triggering gift taxes or filing requirements. Couples can double this amount by splitting gifts. Make these gifts before year-end, as unused amounts don’t roll over to the next year.
Plan Ahead for Success
Implementing these strategies can significantly reduce your tax liability and optimize your financial outcomes. However, year-end tax planning is just one piece of a larger strategy. Working with a knowledgeable tax advisor ensures you take full advantage of these opportunities while staying compliant with tax regulations.
At JS Morlu, we specialize in helping individuals and businesses navigate complex tax laws and uncover savings opportunities. Contact us today to develop a customized year-end tax strategy tailored to your unique financial situation.
Take control of your taxes and end the year on a high note!
