As the end of the year approaches, it’s the perfect time to evaluate your tax situation and implement strategies to minimize your tax liability. Thoughtful planning now can make a significant difference when you file your return next year. Below are key strategies and actionable tips to help you get ahead before December 31.
1. Set Aside Time to Plan
Effective tax planning begins with understanding your current financial situation and anticipating potential changes in the upcoming year. Are you expecting a raise, a job change, or a significant financial event like retirement? Identifying whether your tax rate will increase or decrease next year allows you to optimize your moves now. Remember, most tax-saving opportunities close on December 31, so don’t delay.
2. Defer Income to Next Year
If you expect to be in a lower tax bracket in 2025, consider deferring income into the new year. This strategy can help reduce your 2024 taxable income. Here are examples:
Postpone a Year-End Bonus: Speak with your employer to delay any discretionary bonuses.
Delay Invoices or Payments: If you’re self-employed, defer issuing invoices or collecting payments for services until January.
Rents or Business Debts: Push back the collection of rental income or other business-related payments.
Deferring income makes the most sense if you anticipate earning less in 2025, such as retiring or transitioning to a lower-paying job.
3. Accelerate Deductions into This Year
If you itemize deductions, accelerating certain payments before the year-end can reduce your 2024 taxable income. Consider paying for the following expenses now instead of waiting until early 2025:
State and Local Taxes: Prepay property taxes or estimated state income taxes (but beware of the $10,000 SALT cap for itemized deductions).
Mortgage Interest: Make an extra mortgage payment to capture additional interest deductions.
Medical Expenses: Pay outstanding medical bills to maximize your deductions if you meet the 7.5% adjusted gross income (AGI) threshold.
This strategy is particularly effective if you expect to claim itemized deductions that exceed the standard deduction this year.
4. Maximize Charitable Contributions
Charitable donations not only support worthy causes but can also lower your taxable income if you itemize. Here’s how to make the most of this deduction:
Cash Donations: Deduct up to 60% of your AGI for cash contributions to qualifying public charities.
Donated Property: Contributions of appreciated assets, such as stocks or real estate, can offer a double benefit—you avoid capital gains taxes while deducting the fair market value.
Carryover Deduction: If you exceed annual contribution limits, the excess can be carried forward for up to five years.
Tip: Consider ‘bunching’ donations—making larger contributions in one year to surpass the standard deduction threshold and maximize your tax savings.
5. Increase Withholding to Avoid Penalties
If you anticipate owing taxes for 2024, you can increase your withholding on Form W-4 to avoid underpayment penalties. Withholding is treated as if it’s been paid evenly throughout the year, regardless of when the actual deductions occur. This can be particularly helpful for:
Taxpayers who received unexpected income during the year (e.g., investment gains, bonuses).
Those at risk of owing penalties for underpayment of estimated taxes.
Consult with your HR department or tax professional to adjust your withholding accordingly.
6. Boost Retirement Contributions
Maxing out contributions to retirement accounts is one of the most effective ways to reduce your taxable income while saving for the future. Consider the following opportunities:
401(k) Plans: Contribute up to $23,000 in 2024 ($30,500 if you’re age 50 or older).
Traditional IRA: Contribute up to $7,000 ($8,000 if you’re age 50 or older) by April 15, 2025. While Roth IRA contributions aren’t deductible, qualified distributions are tax-free.
For employer-sponsored plans like 401(k)s, contributions must be made by December 31. IRA contributions, however, give you a bit more time—until the tax filing deadline in April.
7. Take Required Minimum Distributions (RMDs)
If you’re age 73 or older, you are required to take RMDs from traditional IRAs and qualified retirement plans. Failing to do so triggers steep penalties—25% of the amount not withdrawn (reduced to 10% if corrected quickly). Here’s what you need to know:
Deadline: Most RMDs must be taken by December 31.
Still Working Exception: If you’re still employed and participating in your employer’s plan, you may be able to delay RMDs for that specific plan.
Inherited Accounts: Non-spouse beneficiaries generally must take annual distributions and may need to fully deplete the account within 10 years.
Ensure you calculate your RMD accurately to avoid penalties.
8. Weigh Year-End Investment Moves
Tax considerations shouldn’t drive investment decisions, but they are important when managing your portfolio at year-end. Two key strategies to consider are:
Harvesting Losses: Offset capital gains by selling underperforming investments to realize losses. Excess losses can offset up to $3,000 of ordinary income annually ($1,500 if married filing separately) and carry forward indefinitely.
Capital Gains Timing: If you expect to be in a higher tax bracket next year, consider realizing gains in 2024 while your rate is lower.
Consult a financial advisor to align investment moves with your overall financial goals.
9. Plan for Changing Tax Circumstances
Your tax strategy depends on whether you expect your income or deductions to change next year. Here’s how to decide:
Consider Deferring Income and Accelerating Deductions If:
You expect to be in a lower tax bracket next year (e.g., retiring or earning less).
Your itemized deductions are greater than the standard deduction this year.
Consider Accelerating Income and Postponing Deductions If:
You expect to be in a higher tax bracket next year.
The standard deduction exceeds your itemized deductions this year.
You’re subject to the Alternative Minimum Tax (AMT) in 2024.
Final Thoughts
The end of the year offers a limited window to make strategic financial moves that can reduce your tax burden and set you up for success in the new year. Whether it’s maximizing deductions, adjusting your withholding, or managing retirement contributions, taking action now can pay dividends when tax season rolls around. For personalized guidance, consider consulting a tax professional to tailor these strategies to your unique situation.
Remember: December 31 is the deadline for most tax-saving opportunities, so don’t wait—start planning today!