As the year draws to a close, it’s crucial to take a proactive approach to tax planning. Whether you’re an individual taxpayer or a business owner, these strategies can help you optimize your tax situation and potentially save money. Here are some key considerations for year-end tax planning:
For Individuals
Max Out Your Retirement Contributions for 2024
Contributing to retirement accounts like 401(k)s or IRAs can reduce your taxable income. For 2024, the contribution limit for 401(k) plans is $22,500, with an additional $7,500 catch-up contribution for those aged 50 and over.
You have until:
- December 31, 2024, to contribute to your employer plan (SIMPLE and SEP-IRA contributions are allowed until the extension date if one is filed).
- The April 2025 tax-filing deadline to contribute to your traditional or Roth IRAs.
Reach Your 529 Education Savings Goals With a 2024 Contribution
529 plans are a great way to give the gift of education while reaping tax benefits too.
- You can contribute up to $18,000 in 2024 for single filers ($36,000 if married filing jointly) per beneficiary without triggering the federal gift tax.
- You may be able to deduct your contributions from your state income tax (or get a state tax credit) depending on where you live.
- If you want to contribute more to a 529 account in a single year, you can “superfund” the account without it counting against your lifetime gift tax exemption. By superfunding a 529, you can make up to 5 years’ worth of contributions ($90,000 for 2024) all at once to reduce your taxable estate.
Note: You can also make unlimited payments directly to educational institutions on behalf of others for qualified expenses without incurring a taxable gift or affecting your $18,000 gift exclusion. This method is a great way to help a loved one pay for their education.
For example, say you wanted to pay your grandchild’s $50,000 tuition for her medical degree. You could pay the university directly for their tuition and still give them an additional $18,000 tax-free. This strategy reduces your taxable estate and helps preserve your lifetime gift and estate exemption.
Complete a Roth Conversion by December 31, 2024
You have until the end of this year to complete a Roth IRA conversion for the 2024 tax year.
Roth IRAs offer many benefits—including tax-free growth and tax-free distributions—assuming you’re age 59½ and you’ve held the account for at least 5 years. There are also no RMDs, making it easier to leave a tax-free inheritance to your heirs. But there are some additional tax considerations to keep in mind when considering a conversion. Here are a few to look at:
- A Conversion is a Taxable Event: When converting assets from a traditional IRA to a Roth IRA, there are no income restrictions and you don’t have to convert the entire amount at once. Since you’ll owe ordinary income taxes on any pre-tax amounts, partial conversions make it easier to spread out your tax payments over 2 or more years. To avoid paying a higher tax rate, you may want to consider converting an amount that keeps you in your desired tax bracket. Depending on your home state, you may also have to pay state income taxes on a conversion.
- Timing Matters: Deciding when to convert often hinges on whether your tax rate will be higher now or in the future. If you believe your tax rate is lower now than it will be when you start taking withdrawals, a conversion may be beneficial because you’ll pay conversion income taxes now—while you’re in a lower tax bracket—and enjoy tax-free Roth IRA withdrawals later—when the higher tax bracket won’t matter. It’s also important to note that tax rates are set to rise when the 2017 Tax Cuts and Jobs Act expires at the end of 2025. So, if you’ve been putting off a Roth conversion, those rising tax rates may make this a good time to get the conversion process started.
- Ways to Manage Conversion Taxes: If you’re 73 or older, you’ll need to satisfy your RMD before converting, which will result in a taxable event. However, taking advantage of a qualified charitable distribution (QCD) can help ease the overall tax burden associated with a conversion. Tax deductions for charitable contributions and tax credits that might otherwise be carried into future years can also help offset the taxes generated by a conversion. The IRS requires you to aggregate all your IRAs—regardless of which accounts you’re converting—for the purpose of calculating the taxable basis.
Tax-Loss Harvesting
If you have any realized capital gains for the year, you can take advantage of tax-loss harvesting by offsetting your gains by intentionally selling securities from one of your taxable accounts at a loss and reinvesting the money in a similar investment or rebalancing, if needed. It’s important to be aware of the IRS wash-sale rule when reinvesting the funds. If you buy the same investment or any investment the IRS considers “substantially identical” within 30 days before or after you sold at a loss, you won’t be able to claim the loss.
Then you can use your realized losses to offset any capital gains that occurred during the same tax year, plus up to $3,000 of ordinary income ($1,500 if you’re married, filing separately). You can also carry forward any remaining losses indefinitely to help offset gains and $3,000 of income in future tax years.
Charitable Contributions
Donations to qualified charities can be deducted from your taxable income. Ensure you have proper documentation for all contributions. For charitable donations made by December 31, 2024, you can deduct up to 60% of your 2024 adjusted gross income (AGI) for cash gifts made to a qualifying charity (which excludes private foundations and supporting organizations). The deduction is usually limited to 30% of your AGI for noncash contributions such as appreciated stock gifts and donations to qualifying private foundations or organizations.
Check Your Withholding and Estimated Taxes
Make sure you’ve paid enough taxes throughout the year to avoid penalties. Adjust your withholding or make estimated tax payments if necessary.
For Businesses
Accelerate Deductions and Defer Income
Consider accelerating deductible expenses into the current year and deferring income to the next year to reduce your taxable income for 2024. Note that this works for accrual basis taxpayers only. If your method of accounting is cash basis, then you can deduct expenses when paid and record income when received.
Review Depreciation Options
By purchasing equipment, machinery, or other assets just before the fiscal year closes, you can benefit from immediate section 179 expensing or bonus depreciation, allowing a more significant portion of the asset’s cost to be deducted this year. This strategy lowers your overall tax bill and helps your business prepare for growth with new tools and technology.
Prior to making these purchases, consider your cash flow and ensure the assets align with your business needs. Spending wisely on necessary upgrades can maximize tax savings without straining resources.
Evaluate Your Business Structure
Assess whether your current business structure (e.g., sole proprietorship, partnership, corporation) is still the most tax-efficient. Changes in tax laws may make another structure more beneficial.
Plan for Employee Benefits
Offering benefits like health insurance, retirement plans, and other fringe benefits can provide tax advantages for both the business and employees.
Stay Informed on Tax Law Changes
Keep up-to-date with any changes in tax legislation that could impact your business. Consult with a tax professional to ensure compliance and optimize your tax strategy.
General Tips
Organize Your Records
Keep thorough records of all income, expenses, and deductions. This will make tax filing easier and help you identify potential tax-saving opportunities.
Consult a Tax Professional
By taking these steps now, you can position yourself for a smoother tax season and potentially reduce your tax burden. Remember, proactive planning is key to making the most of your tax situation.
Tax laws are complex and constantly changing. Please don’t hesitate to contact us if you have any specific questions or need personalized advice to identify and maximize tax efficient opportunities.