Save on Taxes with These 5 Year-End Financial Tips
As December unfolds, it’s easy to overlook year-end tax planning amid the holiday hustle. However, dedicating a few moments now can lead to significant savings come tax season. To help you retain more of your hard-earned money and reduce your tax liability, consider these five strategic moves before the year concludes.
- Maximize Your Retirement Contributions:
Enhancing your retirement savings not only secures your future but also offers immediate tax benefits. For 2024, the IRS has increased contribution limits:
– 401(k), 403(b), and most 457 plans: You can contribute up to $23,000. If you’re 50 or older, you can make an additional catch-up contribution of $7,500, bringing the total to $30,500.
– Traditional and Roth IRAs: The contribution limit is $7,000, with an extra $1,000 catch-up contribution for those 50 and above, totaling $8,000.
While IRA contributions for 2024 can be made until April 15, 2025, contributing before year-end allows you to benefit from tax-deferred growth sooner.
- Harvest Tax Losses
If you have investments that have declined in value, consider selling them to offset capital gains from other investments—a strategy known as tax-loss harvesting. You can use up to $3,000 of net capital losses to offset ordinary income, with any excess carried forward to future years. Consult with a tax professional to navigate the complexities and avoid wash-sale rules.
- Prepay Deductible Expenses
If your itemized deductions are close to the standard deduction thresholds—$14,600 for single filers, $29,200 for married filing jointly, and $21,900 for heads of household in 2024—prepaying certain expenses can help you exceed the standard deduction and maximize your tax benefits. Consider:
– Mortgage Interest: Making an extra mortgage payment to increase deductible interest.
– Medical Expenses: Scheduling and paying for medical procedures or expenses before year-end, especially if they exceed 7.5% of your adjusted gross income.
– Property Taxes: Paying property taxes due in early 2025 before December 31, 2024, keeping in mind the $10,000 cap on state and local tax deductions.
– Tuition Payments: Prepaying college tuition for the upcoming semester may qualify you for education credits, such as the American Opportunity Tax Credit, worth up to $2,500 per eligible student. Be aware of income phase-out ranges for these credits.
- Bundle Charitable Contributions
If your charitable donations don’t typically exceed the standard deduction, consider “bunching” multiple years’ worth of contributions into one year to maximize your itemized deductions. Establishing a donor-advised fund allows you to make a large charitable contribution in one year, receive the tax deduction, and distribute funds to charities over time. This strategy is particularly effective if you have appreciated securities, as donating them can help you avoid capital gains taxes.
- Contribute to a 529 College Savings Plan
Contributions to a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. While there’s no federal tax deduction for contributions, many states offer tax benefits. For example, California does not provide a state tax deduction for 529 contributions, but the tax-free growth and withdrawals still offer significant benefits. Check your state’s specific rules to understand the potential tax advantages.
By implementing these strategies before December 31, you can optimize your tax situation and set a strong financial foundation for the upcoming year. Always consult with a tax professional, (we happy to help you as well) to tailor these strategies to your personal circumstances and ensure compliance with current tax laws.
