As the year draws to a close, it’s time to turn your attention to year-end tax planning. Whether you’re an individual taxpayer or a business owner, taking the right steps now can help reduce your tax burden and set you up for a stronger financial future. While tax planning may seem overwhelming, breaking it down into manageable steps can help you feel more in control.
Here’s a year-end tax planning checklist to help you take advantage of every opportunity before the calendar flips to January.
1. Review Your Income for the Year
Before you can make any decisions about deductions or credits, it’s essential to get a clear picture of your total income for the year. This includes:
Wages and Salary: Review your pay stubs or year-to-date reports.
Investment Income: Check dividends, capital gains, and interest income.
Business Income: If you’re self-employed, assess your revenue and expenses.
Retirement Withdrawals: Review any distributions from IRAs, 401(k)s, or other retirement accounts.
Knowing where you stand in terms of income will help you figure out strategies for reducing your taxable income.
2. Maximize Retirement Contributions
Contributing to retirement accounts can reduce your taxable income for the year, and the end of the year is the perfect time to boost your savings.
401(k) and 403(b): If your employer offers a retirement plan, make sure you’ve contributed the maximum allowable amount for 2024—$22,500 ($30,000 if you’re 50 or older).
Traditional IRA: You can contribute up to $6,500 ($7,500 if 50 or older) to a traditional IRA, and contributions may be deductible depending on your income and whether you or your spouse are covered by a workplace retirement plan.
SEP IRA or Solo 401(k) (for self-employed individuals): These options allow larger contributions, up to $66,000 for a Solo 401(k) or $66,000 (or 25% of income) for a SEP IRA.
Check your contributions and see if there’s still room to contribute for 2024 to lower your taxable income.
3. Tax-Loss Harvesting
If you’ve had investments that have lost value this year, you can use those losses to offset gains in other areas of your portfolio. This strategy, known as tax-loss harvesting, allows you to reduce your taxable income by selling investments at a loss.
You can offset up to $3,000 of ordinary income each year with capital losses. If your losses exceed that amount, they can be carried forward to future years. Make sure to consult with your financial advisor to determine the best strategy for your investments.
4. Contribute to Charitable Causes
Making charitable contributions before the end of the year can lower your taxable income. Donating to qualified charities not only supports good causes but can also offer significant tax savings.
Cash donations: You can deduct up to 60% of your adjusted gross income (AGI) for cash donations, provided the charity is qualified.
Non-cash donations: Donating goods or property can also provide tax deductions, but be sure to get a receipt for donations and follow IRS guidelines for valuing items.
Consider making any donations before December 31st to take advantage of this deduction on your current tax return.
5. Consider Bunching Deductions
For taxpayers who itemize their deductions, “bunching” is a strategy where you accelerate deductions into a single year to exceed the standard deduction threshold.
Medical expenses: If you have significant medical expenses in a given year, consider paying them before the end of the year to count toward your itemized deductions.
Property taxes: Prepaying property taxes or charitable contributions could push your total deductions higher for the year.
The standard deduction for 2024 is $27,700 for single filers and $55,400 for married couples filing jointly, so you’ll want to make sure your itemized deductions exceed these amounts to benefit from them.
6. Review Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs)
FSAs and HSAs are great ways to save on taxes by paying for eligible medical expenses with pre-tax dollars. However, FSAs often have a “use-it-or-lose-it” rule, meaning any unused funds may not roll over into the next year.
FSAs: If you have funds left in your account, consider using them before December 31st to avoid losing them.
HSAs: Contributions to an HSA are tax-deductible, and the funds roll over from year to year. In 2024, you can contribute up to $3,850 for individuals or $7,750 for families, plus an additional $1,000 if you’re 55 or older.
Maximize your contributions and use the funds wisely to reduce your taxable income and manage healthcare costs.
7. Review Your Withholding and Estimated Taxes
If your income has changed this year, your tax withholding may no longer be appropriate. Review your paycheck stubs and estimated tax payments to make sure you’re on track to avoid underpayment penalties.
W-4 Update: If you’ve had a major life event like a marriage, divorce, or the birth of a child, you may need to adjust your withholding to reflect these changes.
Estimated tax payments: If you’re self-employed or have significant income outside of wages, make sure you’ve paid enough in estimated taxes to avoid penalties.
8. Plan for 2025: Set Your Financial Goals
While year-end planning is essential, it’s also a great time to think ahead to the new year. Consider your tax strategy for 2025:
Tax brackets and deductions: Be mindful of potential changes in tax laws that may affect your income.
Retirement savings goals: Look ahead to how much you want to save for retirement next year and plan accordingly.
Starting early can help you implement tax-saving strategies before the next year’s tax season begins.
Year-end tax planning is a crucial step to ensure you’re not leaving money on the table. By taking the time to review your income, deductions, and contributions, you can reduce your tax liability and improve your overall financial health. Whether it’s making contributions to retirement accounts, donating to charity, or adjusting your withholding, small actions taken now can make a big difference when it’s time to file your taxes.
Remember, tax laws are constantly changing, so it’s a good idea to consult with a tax professional to ensure you’re making the most of every opportunity.
Happy tax planning!