As 2024 draws to a close, it’s an ideal time to take proactive steps to minimize your tax burden. By shifting income and making strategic moves before year-end, you can reduce your taxable income and maximize potential savings. In this post, we’ll explore some essential year-end tax tips to help you make the most of the final days of the year.
Many tax experts talk about shifting your tax burden from one year to the next, which can often reduce your tax bill. While in theory it may make sense, how can you make it work for you in practice?
Since the tax code is complex in its construction, there are often opportunities to reduce your tax burden by controlling the amount of your taxable income. This is because:
So if you can shift your income and expenses from one year to the next, you could create a net tax obligation for both years that might be lower than if you did nothing. Here are six ideas to accomplish this.
Identify whether you are a good candidate for using shifting as a tax planning strategy. For singles, the income tax rate increases 80% or more on earnings over $47,150. For married couples, that increase occurs with adjusted gross income over $94,300. But other tax benefits are lost at different income levels. Common tax breaks subject to income limits are child tax credits, earned income credits, educational credits, premium health care credits and many educational tax benefits.
If you itemize your deductions, consider loading up your cash and non-cash contributions into the year that lowers more highly-taxed income. For example, you could shift next year’s donations to your church into this year. This bunching of itemized deductions into one year makes even more sense with the higher standard deductions introduced in 2018.
You can take a deduction when you pay for it. A credit card receipt is good on the date you run the transaction and not when you pay your monthly bill to the credit card company. Knowing this, you could pay a property tax statement or a house payment either a little early or a little late to change whether that deduction occurs in this year or next.
There are many cases when this technique is an important tax shifting tool. The most common example applies to those who are under the full retirement age and receiving Social Security benefits. If this applies to you, consider actively managing your part-time work or you could end up paying taxes on some of your Social Security benefits or even losing some of them. Work can also hurt your tax situation when a dependent’s wages put you over the earnings threshold to receive the Health Insurance Premium Tax Credit. It may make sense to stop working or arrange to get your last paycheck delayed into the following year.
Those over age 59½ can use distributions from pre-tax retirement plans to tightly control their taxable income. Your withdrawal calculation should include evaluating how to maximize the tax efficiency of your income. An analysis may indicate it is better to take out a little more this year to get these retirement earnings taxed at a lower rate than if you waited until next year.
You have up to $3,000 in investment losses that can offset your higher-taxed ordinary income. Use this to your advantage when deciding whether to take a stock loss this year or next. If done correctly, you can match your stock loss against ordinary income which is taxed at a higher rate.
Should you have any questions on these ideas, ask for help prior to taking action. In many cases, the requirements and documentation needed are important to ensure you receive the full tax savings benefit.
At the end of each year there are a number of things to consider that may have a positive impact on your tax obligation. Here is a list of fourteen ideas that may be worth a quick review before the clock strikes midnight on December 31st.
1. Make last minute charitable donations. Pay attention to your itemized deduction limit to ensure your deduction will count.
2. Make a gift (or two). Review and maximize use of the $18,000 annual gift giving limit.
3. Review your investment portfolio for capital gain and loss planning.
4. Use your annual $3,000 net capital loss limit to lower ordinary income if appropriate.
5. Maximize the kiddie tax threshold rules ($2,600 of unearned income taxed at your child’s lower tax rate).
6. Consider fully funding retirement accounts with your annual contributions.
7. Identify any potential household employees.
8. Consider donating appreciated stock owned one year or longer.
9. Review retirement accounts for required minimum distributions (RMD).
10. Review medical and dependent care funding accounts to ensure you do not lose contributions that do not roll over into the new year.
11. Consider retirement plan rollover options into Roth IRAs.
12. Estimate your tax liability and make any final estimated tax payments.
13. Begin organizing your tax records. Create a list of expected 1099 and other tax forms you will be receiving. Download last year’s free tax preparation checklist to use as a guide.
14. Review your W-2 withholdings and file any changes with an updated W-4 Form your employer for the upcoming year.
These are great examples of how tax planning throughout the year is essential. To ensure you’re taking full advantage of these year-end strategies, it’s always a good idea to consult with your accountant and advisor, who can tailor a plan to your specific financial situation.
Empowering business owners and individuals in South Jersey and Philadelphia to feel confident through proactive accounting and advisory solutions.
