Editor’s note: This is the second in a four-part series on year-end financial planning designed to help you close out the year on a high note.
As the year ends, tax planning should be at the forefront of your financial checklist. A proactive approach to tax management helps minimize your tax liability and ensures you're not scrambling when tax-filing season arrives. A few of these ideas are only available until the end of the calendar year, so don’t putter around. What follows is a list of potential moves that I’d encourage you to discuss with your tax adviser.
Harvest Investment Losses
If some of your investments took a hit this year, consider tax-loss harvesting. This strategy involves selling losing investments to offset capital gains and reduce your taxable income. While you don’t want to let the tax tail wag the investment dog, this can be a smart strategy when you have unrealized losses in your non-retirement accounts. Remember, to avoid a wash sale, which would prevent you from taking the loss, you may not buy a “substantially identical” security to the one you sold within 30 days of selling it. Again, consult your tax adviser if you have questions, but don’t miss out on this classic lemons-to-lemonade strategy.
Charitable Contributions
The end of the year is also an excellent time to review your charitable giving. Donations to qualified organizations can be deducted from your taxable income if you itemize your deductions. Keep track of all donations and remember that non-cash donations, such as clothing or furniture, can also be deducted. If you’re charitably inclined and age 70½ or older, talk to your tax adviser about the benefits of a qualified charitable distribution from your IRA as an option to create a win-win scenario.
Review Your Withholding
If you've had major life changes this year, such as a marriage, divorce or birth of a child, you may need to adjust your tax withholding. This is an easy fix that can have a big impact on your tax liability come April.
Maximize Tax-Advantaged Accounts
Take full advantage of tax-advantaged accounts such as 401(k)s, IRAs and health savings accounts (HSAs). Contributions to these accounts can reduce your taxable income, and HSAs also offer a triple tax benefit: Contributions are tax deductible, they grow tax free, and withdrawals for medical expenses are tax free. If your situation permits, boosting your payroll contributions over the last few paychecks of the year can help you build for the future and save on taxes today.
Leverage Tax Brackets
Our progressive tax brackets may offer you an opportunity to make a withdrawal from your retirement plan or a conversion from traditional to Roth IRAs without paying more tax on the last dollar. This can make a lot of sense for those who could have additional income and remain in the 10%, 12% or even 22% tax bracket. For example, in 2024, a married couple filing jointly could have up to $94,300 in taxable income and still be in only the 12% bracket. So if they tally up the numbers in December, and it looks like their taxable income will end up at $70,000, they would have the opportunity to pay only 12% on up to $24,300 of additional income.
In that context, it may make sense to make a voluntary distribution from their IRAs or retirement plans or convert $24,300 from traditional to Roth. Again, the idea would be to get the money through the “tax hurdle” with as little pain as possible.
Don’t Lose Track of RMDs
There is comfort in stability and routine. Well, that’s not necessarily been the case when it comes to the rules surrounding required minimum distributions (RMDs). They have been in a constant state of flux in recent years. For those born between 1951 and 1959, RMDs begin at age 73. However, if you were born in 1960 or later, RMDs start at age 75. And although the penalty for not taking your RMD has become less punitive in recent years, it’s still 25% of the amount not taken on time. So don’t miss your RMD, and, yes, talk to your tax adviser if you have questions.
By proactively managing your taxes at the end of the year, you can avoid surprises and ensure that your finances are in top shape heading into the new year.
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Related: Your Year-End Financial Action Plan, Part I: Setting the Stage
