As the year draws to a close, tax planning becomes an important task for individuals. Proactively managing your finances before December 31 can help minimize your tax burden and set you up for a financially secure new year.
This article will outline key tax strategies and provide a comprehensive checklist for year-end planning. Whether you’re looking to take advantage of deductions, maximize retirement savings, or plan for your children’s education, this guide will help you stay on top of important tax decisions.
8 Key Tax Strategies for Individuals
1. Itemized Deduction Bunching
For taxpayers who typically itemize their deductions, the strategy of "bunching" deductions can make a significant impact. Instead of spreading charitable contributions, medical expenses, and other deductible costs across multiple years, consider consolidating them into a single year. By "bunching" these deductions, you may surpass the standard deduction threshold and maximize your itemized deductions for the year.
For example, if you typically donate $5,000 annually to charity, but you are not receiving a tax benefit because you are utilizing the standard deduction, consider giving multiple years of contributions in 2024, which could help you exceed the standard deduction amount allowing you to itemize your deductions providing more tax benefits.
2. Medical Expenses
For those who have significant medical expenses, it's important to note that only the portion of medical expenses that exceed 7.5 percent of your adjusted gross income (AGI) can be deducted. If you're close to reaching that threshold, consider scheduling medical procedures, doctor visits, or purchasing necessary medical equipment before the year ends. Keep in mind that medical expenses are only deductible in the year they are paid, so timing matters.
3. Charitable Contributions
Making charitable donations can reduce your taxable income while supporting causes that matter to you. As you consider year-end charitable giving, there are a few strategies to keep in mind:
- Qualified Charitable Distributions (QCDs): If you're 70½ or older, you can direct up to $105,000 (2024 limit), from your IRA to a charity as a QCD. This donation counts toward your required minimum distribution (RMD) and is excluded from your taxable income. It also cannot be counted as a deductible charitable contribution.
- Donor-Advised Funds (DAFs): DAFs allow you to make a charitable contribution in 2024, receive the tax deduction now, while deciding which charities to support over the next several years.
- Appreciated Stock Donations: Donating appreciated stocks that have been held for over one year instead of cash, generally provides a double benefit. It allows you to avoid paying capital gains tax on the appreciation, while still receiving a charitable deduction equal to the property’s fair market value.
4. Gain & Loss Harvesting
Year-end is the perfect time to review your investment portfolio for potential tax savings opportunities. Tax loss harvesting involves selling investments that have declined in value to offset any taxable capital gains you’ve realized during the year. This can help reduce your overall taxable income and lower your tax bill.
If you have unrealized gains, you might also consider gain harvesting, selling appreciated assets in a year when your income is lower to take advantage of lower capital gains rates.
5. Retirement Planning
Making contributions to your retirement accounts before year-end can significantly reduce your taxable income and help you save for the future.
Here are a few key retirement planning strategies to consider:
- Fund IRAs and 401(k)s: You can contribute up to $7,000 ($8,000 if you're 50 or older) to a traditional IRA or Roth IRA (subject to income limitations). Contributions to a traditional IRA may be deductible, lowering your taxable income for 2024. Similarly, 401(k) contributions can be made up to $23,000 ($30,500 if you're 50 or older).
- Consider Roth Conversions: If you expect your tax rate to be higher in future years, it may be beneficial to convert some or all of your traditional IRA or 401(k) funds into a Roth IRA in 2024. While this conversion triggers taxes now, it can reduce future tax liabilities, as qualified withdrawals from a Roth IRA are tax-free.
- Backdoor Roth Conversions: High-income earners who are not eligible to contribute directly to a Roth IRA may be able to still make Roth contributions by using a backdoor Roth conversion strategy. This involves contributing to a traditional IRA and then converting those funds to a Roth IRA (assuming the individual has no other IRAs with deductible contributions).
6. Required Minimum Distributions (RMDs)
If you reach 73 in 2024, you're required to begin taking minimum distributions from your retirement accounts (traditional IRAs, 401(k)s, etc.) by April 1, 2025. However, delaying the 2024 required distribution until 2025 will require you to include the 2024 and 2025 distribution in income in 2025. Failure to take the required minimum distribution can result in a penalty up to 25 percent on the amount you should have withdrawn. Review your accounts to ensure you’ve met your RMD requirement for the year and consider making charitable contributions through a QCD if applicable.
7. Education Planning
If you're planning to save for education expenses, the end of the year is a good time to consider contributions to a 529 plan. Contributions to a 529 plan can grow tax-free, and many states, including Pennsylvania, offer a tax deduction or credit for 529 plan contributions.
- 5-Year Superfunding Strategy: The "superfunding" strategy allows you to contribute up to five years' worth of gifts ($90,000 for individuals, $180,000 for married couples) to a 529 plan in a single year. A gift tax return is required to be filed but may not be taxable if this is the only gift made to that person in the current year. This can be a great way to accelerate your child’s education savings.
8. Estimated Taxes and Withholding
If you are self-employed or otherwise expect to owe additional taxes, it's important to review your estimated tax payments before year-end. Underestimating your tax liability can lead to penalties for underpayment.
Implement Your Year-End Tax Planning Strategies with Help from Kreischer Miller’s Tax Strategies Team
Year-end tax planning is a valuable opportunity to take control of your finances and reduce your taxable income for the year. Taking the time to review your financial situation, consult with your tax advisor, and implement these year-end strategies will ensure that you enter 2025 knowing you've made proactive decisions to optimize your tax savings.
If you would like to discuss a tax plan that takes full advantage of all strategies available to you, please contact us or click to learn more about Kreischer Miller’s Tax Services.