As the year draws to a close, it’s time to focus on tax strategies that can minimize your liabilities and optimize your financial position. Acting promptly is crucial, as tax and financial professionals tend to be especially busy during the 4th quarter. Many tax professionals were occupied until after October 15th, working on tax returns that were on extension. Additionally, if your tax situation requires action through your investment custodian, such as making a donor-advised fund contribution or completing a Roth conversion, don’t wait until year-end. Custodians are particularly busy then and can’t guarantee they’ll complete client-requested actions unless you meet their deadlines.
If you have a complex tax situation, consulting with a tax preparer is highly recommended. They can help you assess your estimated tax liabilities, evaluate your current situation, test different strategies, and make adjustments before year-end. This is particularly important if you’re self-employed, own rental real estate, have bought or sold a house during the tax year, have income not subject to regular withholdings, receive equity compensation, or are considering a Roth conversion.
Key areas to consider include:
1. Retirement Contributions
Assess your contributions to tax-advantaged retirement accounts like 401(k)s, Flexible Spending Accounts (FSAs), and Health Savings Accounts (HSAs). For 2024, increased contribution limits provide an excellent opportunity to maximize these benefits. If you’re 50 or older, remember that catch-up contributions are available.
2. Required Minimum Distributions (RMDs)
Plan for RMDs from your retirement accounts, which apply to individuals aged 73 and older, as mandated by the IRS, or to beneficiaries of an inherited IRAs. Ensure you meet the required distribution amounts to avoid penalties and optimize your tax situation. Consider Qualified Charitable Distributions (QCDs) as a tax-efficient way to fulfill these RMDs while supporting charitable organizations. QCDs allow individuals aged 70½ or older to donate directly from their IRA to a charity, satisfying their RMD while reducing taxable income.
3. Charitable Giving
Explore charitable contributions to reduce your taxable income. Donations to qualifying organizations can provide significant tax deductions, especially when contributing appreciated assets like stocks. Consider the benefits of Donor-Advised Funds (DAFs), which allow you to make a charitable contribution, receive an immediate tax deduction, and make grants to charities over time.
4. Annual Gifts and Tax Planning
Take advantage of the annual gift tax exclusion, which allows you to give a specific amount (currently $18,000 per recipient for 2024) without incurring a gift tax. A couple can give up to $36,000 to a single individual. Strategic gifting can help reduce your taxable estate while providing financial support to family and friends.
5. Roth Conversions
For clients considering a Roth conversion in their year-end tax strategy, timing is key. A Roth conversion shifts funds from pre-tax accounts to a Roth IRA, creating an immediate tax liability. However, future withdrawals are tax-free, which is beneficial if you expect to be in a higher tax bracket in retirement. Careful planning can prevent moving into a higher tax bracket during the conversion year. Due to year-end deadlines set by investment account custodians, completing Roth conversions by early to mid-December, at the latest, is imperative.
Protecting your financial future requires proactive steps. Regularly monitor accounts, freeze your credit, use multi-factor authentication, stay vigilant against
By addressing these areas and taking proactive steps before year-end, you can reduce your tax burden and improve your financial position. Early planning helps you navigate the tax landscape effectively, minimizing liabilities and positioning you for success in the coming year.