Here are some effective year-end tax planning strategies that can help optimize deductions, manage income, and position yourself for potential tax savings:
1. Maximize Retirement Contributions
Contributing to tax-advantaged retirement accounts, such as a 401(k) or IRA, can lower taxable income.
For 2024, you can contribute up to $23,000 ($30,500 if you’re over 50) to a 401(k) and $7,000 ($8,000 if over 50) to a traditional IRA, depending on income limits.
2. Take Advantage of Tax-Loss Harvesting
Offset capital gains by selling investments that have decreased in value to realize losses.
Losses can offset gains, and any additional losses (up to $3,000) can offset ordinary income.
3. Review Charitable Giving
Make charitable contributions before December 31 to qualify for a deduction.
Consider a donor-advised fund if you want a tax deduction this year but haven’t decided where to donate yet.
If over 70½, you can make a qualified charitable distribution (QCD) from your IRA directly to a charity, reducing taxable income.
4. Defer or Accelerate Income and Expenses
If you expect to be in a lower tax bracket next year, consider deferring income into next year (e.g., delay client invoicing).
Conversely, accelerate expenses into this year, such as business expenses, to maximize deductions if in a higher bracket this year.
5. Utilize Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA)
Ensure you’ve used up your FSA balance before the year-end to avoid losing funds, as some accounts do not allow rollover.
Contribute to an HSA if you have a high-deductible health plan (HDHP), allowing you to save pre-tax money for medical expenses.
6. Bunch Deductions if Itemizing
If your itemized deductions are close to the standard deduction, consider “bunching” deductions by prepaying deductible expenses (e.g., property taxes or medical expenses) to maximize deductions this year.
7. Take Advantage of the Section 179 Deduction
For business owners, consider purchasing equipment or software that qualifies for the Section 179 deduction, allowing for the immediate expense of the purchase rather than depreciating it over time.
8. Review Your Withholding and Estimated Taxes
If you expect a large tax bill, consider adjusting withholding or making additional estimated tax payments to avoid underpayment penalties.
9. Plan for Required Minimum Distributions (RMDs)
If you’re over 73, ensure you’ve taken your RMDs from retirement accounts. Failing to do so can lead to a 50% excise tax on the amount not withdrawn.
10. Consider Gifting Strategies
For estate planning, you can gift up to $18,000 per recipient annually without affecting your lifetime gift tax exemption.
Making educational or medical payments directly on behalf of someone else is also exempt from gift tax limits.
These strategies can help maximize tax savings for 2024 and ensure you’re well-prepared for the upcoming tax season.