Flowing sand shaped of tax text inside the hourglass. (3d render)
As 2024 winds down, there is still some time left to optimize your tax strategy. Potential tax increases loom after 2025. However, these actionable tips can help lower your tax bill and set you up for long-term tax planning success.
1. Max Out Tax-Advantaged Contributions
- Retirement Accounts: Contribute to 401(k), 403(b), or other workplace plans by December 31, 2024. The limit is $23,000 (plus $7,500 for those 50+).
- Health Savings Accounts (HSAs): For high-deductible plans, contribute up to $4,150 (self) or $8,300 (family) by the April 2025 tax deadline. Contributions reduce taxable income, funds can roll over for future medical expenses, and funds can even be invested for long-term growth in many cases.
2. Use Tax-Loss Harvesting
Offset investment gains by selling underperforming investments. Losses can also offset up to $3,000 of ordinary income annually. Unused losses carry forward indefinitely as per current tax rules. Beware of wash sale rules (as per the IRS cryptocurrencies are exempt).
3. Consider a Roth IRA Conversion
You can convert traditional pre-tax IRA funds to a Roth IRA. Taxes are due on the conversion, but future growth and withdrawals are tax-free after 5 years and age 59 1/2. With tax rates set to rise due to the sunset of the TCJA in 2026, this could save you money over the long term depending on your current tax rates, your future tax rates, and your time horizon. Use a calculator like this to help illustrate the potential benefit.
4. Assess the Benefit of Itemizing vs. Taking the Standard Deduction
Itemizing makes sense if your deductions exceed:
- $29,200 (married) or $14,600 (single) for 2024.
- Eligible deductions include medical expenses (over 7.5% of AGI), mortgage interest, state/local taxes (up to $10k per year), and charitable contributions.
5. Claim Education Tax Breaks
The American Opportunity Tax Credit offers up to $2,500 per student for qualified expenses. Consider pre-paying 2025 tuition in 2024 to maximize benefits. In addition, see if your state allows tax deductions for 529 plan contributions.
6. Defer Income
Freelancers or gig workers can delay billing until 2025 to reduce 2024 taxable income. W-2 employees may be able to defer bonuses and other compensation. Consult a tax advisor to ensure this aligns with your goals and if it is too late for this year, consider it for next year.
7. "Bunch" Charitable Contributions
Consider grouping multiple years’ donations into 2024 to maximize your itemized deductions this year while using the standard deduction in future years. Charitable donation vehicles like donor-advised funds can offer flexibility.
8. Donate Appreciated Assets
Consider donating long-term appreciated stocks or mutual funds to avoid capital gains tax and to deduct the fair market value if you itemize your taxes. Exceptions may include personal property owned less than one year, and certain publicly traded stock and mutual funds. This is limited to 30% of AGI, with unused amounts carrying forward for 5 years.
9. Don't Forget Donations of Cash and Property
If you itemize, you can deduct cash contributions as well as property. For example, you can deduct up to 60% of your AGI for any furniture you might donate to your local school. Note that in addition to determining the fair market value of donated items, the IRS requires different types of documentation based on the size of the donation.
10. Gift to Loved Ones
Gift up to $18,000 per recipient (2024 limit) to reduce your estate’s taxable value. Married couples can gift up to $36,000 per recipient. (This amount increases to $19,000 and $38,000 respectively in 2025.) While you don't get an income tax deduction for these gifts, the recipient won't owe taxes, and the gift can help reduce the value of your estate without using up your lifetime gift and estate tax exemption.
11. Take Required Minimum Distributions (RMDs)
If you are 73 or older, withdraw your RMD by December 31 to avoid penalties. Plan carefully to see if this is your first RMD, as deferring until April 1 of the following year may result in two withdrawals in one year, which can increase your taxable income. Remember, withdrawals are taxable, but there are ways to help reduce taxes with careful planning.
12. Reduce RMDs with Qualified Charitable Distributions (QCDs)
You can donate up to $105,000 via a QCD (for joint filers) from your IRA to a qualified charity to satisfy RMD requirements. The donated amount is excluded from taxable income.
Plan for 2025 and Beyond
With the inflation-adjusted tax brackets out for 2025, you may have a little more room before hitting a higher tax rate next year. Be sure to build a flexible tax plan with a trusted and qualified tax professional to balance your current tax savings strategy with your future goals and ensure compliance with IRS rules. See if your employer also offers access to unbiased financial planners through a workplace financial wellness program that can help with tax planning.
