As the year winds down, it’s essential to consider the tax-saving strategies that could help minimize your liability for 2024. Planning ahead and taking specific steps now can significantly impact your tax return and financial health for the year to come. Below are seven important tax moves to consider before the year ends.
1. Defer Income to Next Year
One effective way to reduce your taxable income for the current year is to defer income until 2025. This strategy can be especially beneficial if you anticipate being in a lower tax bracket next year. For example, if you’re expecting a year-end bonus or payments for services rendered, consider asking your employer or clients to delay those payments until January. Similarly, if you’re a business owner, you may want to hold off on collecting outstanding debts, rents, or payments for services. By deferring income, you postpone paying taxes on it until the following year, which could help lower your overall tax burden for 2024.
2. Accelerate Deductions
On the flip side of deferring income, accelerating deductions can further reduce your taxable income. If you itemize deductions, now is the time to make payments for expenses that qualify, such as mortgage interest, state taxes, or medical expenses. Paying these bills before the year ends rather than waiting until early 2025 could provide more significant tax savings on your 2024 return.
For example, you can prepay state or local property taxes or make an additional mortgage payment. If you have large medical expenses this year, consider paying outstanding bills before December 31 to maximize your deductions. This strategy is particularly helpful if your deductible expenses exceed the standard deduction for 2024.
3. Make Deductible Charitable Contributions
Charitable donations are another excellent way to reduce your tax liability if you itemize deductions. Donations to qualified organizations may be deducted up to a certain percentage of your adjusted gross income (AGI). For cash contributions to public charities, you can deduct up to 60% of your AGI, while contributions of property or appreciated assets may allow for smaller percentage deductions, such as 50%, 30%, or 20%, depending on the type of property and charity involved.
Remember, excess charitable contributions that you can’t deduct in 2024 may be carried forward for up to five years, providing additional flexibility. Be sure to keep receipts and documentation of your donations for tax-filing purposes.
4. Bump Up Withholding to Cover a Tax Shortfall
If it looks like you’ll owe federal income taxes for 2024, consider increasing your withholding for the remainder of the year to avoid penalties or a big bill come tax time. You can do this by adjusting your Form W-4 with your employer.
One of the benefits of increasing your withholding is that the IRS treats the withheld amount as though it was paid evenly throughout the year, even if the adjustments are made later in the year. This can be a helpful strategy to cover any underpayments and avoid penalties for missed or low estimated tax payments. Time is of the essence, so act quickly to ensure the adjustments can take effect before the end of the year.
5. Save More for Retirement
Maximizing retirement savings is a smart move for both long-term financial security and short-term tax savings. Contributions to a traditional IRA or an employer-sponsored plan like a 401(k) are tax-deductible, reducing your taxable income for 2024.
For 2024, you can contribute up to $23,000 to a 401(k) plan, or $30,500 if you’re 50 or older. Contributions to IRAs have a lower cap, with a maximum of $7,000 ($8,000 if you’re 50 or older). The deadline for contributing to your 401(k) is December 31, while you have until April 15, 2025, to make IRA contributions for the 2024 tax year.
While Roth IRA contributions are not tax-deductible, Roth IRAs can be beneficial for future tax-free distributions, making them worth considering as part of your overall retirement strategy.
6. Take Required Minimum Distributions (RMDs)
If you’re 73 or older, don’t forget to take your required minimum distributions (RMDs) from traditional IRAs and certain retirement plans before the year ends. Failing to take the necessary RMDs can result in a hefty penalty—25% of the amount not distributed (or 10% if corrected in a timely manner).
RMDs must be withdrawn by December 31, and if you fail to do so, the penalty could negate the tax benefits of your retirement savings. Even if you’re still working and participating in your employer’s retirement plan, special rules may apply, so check with your financial advisor to ensure compliance.
7. Weigh Year-End Investment Moves
It’s crucial not to let taxes dictate your investment decisions entirely, but tax considerations should still play a role, especially at the year’s end. If you’ve realized capital gains from profitable sales of securities, consider selling off losing positions to offset those gains.
Any excess losses can be used to offset up to $3,000 of ordinary income (or $1,500 if married and filing separately). If you don’t use all your losses in 2024, they can be carried forward to future years to reduce your taxable income down the line.
Review your portfolio and think about year-end moves that align with both your long-term financial goals and current tax situation. It might be a good time to rebalance your investments and improve tax efficiency without sacrificing growth potential.
Final Thoughts
Year-end tax planning is an essential part of managing your finances and minimizing your tax burden. By deferring income, accelerating deductions, maximizing retirement contributions, and addressing tax shortfalls, you can make the most of the tax-saving opportunities available to you.
However, these strategies should be personalized based on your unique financial situation. Consulting a tax professional or financial advisor is highly recommended to ensure that your year-end tax moves are appropriate for your needs and in line with current tax laws.
Don’t wait until the last minute to take action—implement these tax strategies before the year ends to help set yourself up for financial success in 2025 and beyond.
By following these steps, you can optimize your tax strategy and keep more of your hard-earned money. Now is the perfect time to start making moves that will positively impact your tax return and overall financial health.
Contact us today for personalized tax planning services and ensure you are prepared for year-end and beyond!
