As the end of 2024 approaches, it’s time to review your financial situation and take proactive steps to minimize your tax liability. Year-end tax planning can be crucial in optimizing your tax position, maximizing deductions, and avoiding unpleasant surprises when filing next year. Here are some effective strategies you can implement before December 31 to reduce your tax burden for 2024.
1. Maximize Retirement Contributions
Contributing to tax-advantaged retirement accounts is one of the most effective ways to lower your taxable income. However, it’s important to be aware of phase-out limits that may impact your ability to contribute:
- 401(k) Contributions: The 2024 contribution limit for a 401(k) is $23,000 (or $30,500 if you’re 50 or older). This limit applies regardless of income, but highly compensated employees (HCEs) making over $150,000 may face restrictions if the plan does not pass nondiscrimination testing.
- Traditional IRA Contributions: You can contribute up to $7,000 ($8,500 if 50 or older) to a traditional IRA. However, if you or your spouse are covered by a retirement plan at work, the deduction for traditional IRA contributions may phase out based on modified adjusted gross income (MAGI):
- Single Filers: The deduction phases out between $73,000 and $83,000.
- Married Filing Jointly: The deduction phases out between $121,000 and $141,000 if covered by a plan. If only your spouse is covered, the phase-out range is $218,000 to $228,000.
- Roth IRA Contributions: Contributions to a Roth IRA are phased out based on MAGI:
- Single Filers: The phase-out range is $146,000 to $161,000.
- Married Filing Jointly: The phase-out range is $218,000 to $233,000.
- If you are above these limits, consider a backdoor Roth IRA strategy.
- SEP IRA for Business Owners: If you’re self-employed, you can contribute up to 25% of your net earnings, with a maximum contribution limit of $68,000 for 2024. This account does not have phase-out limitations based on income.
2. Utilize Tax-Loss Harvesting
If you have investments in a taxable brokerage account, review your portfolio for any underperforming assets. By selling investments that have lost value, you can:
- Offset Capital Gains: Use realized losses to offset any gains you may have earned from selling profitable investments.
- Claim a Deduction: If your capital losses exceed your gains, you can use up to $3,000 ($1,500 if married filing separately) of the net loss to reduce your other taxable income.
Be mindful of the wash-sale rule, which prohibits you from repurchasing the same or a substantially identical asset within 30 days of selling it.
3. Consider Charitable Giving
Donating to qualified charities is a powerful way to reduce your taxable income while supporting causes you care about. Here are some options:
- Cash Donations: You can generally deduct cash contributions up to 60% of your adjusted gross income (AGI).
- Donor-Advised Funds (DAFs): If you’re unsure which charities to support but want the tax deduction now, consider contributing to a donor-advised fund. You’ll get the deduction this year while deciding later on how to distribute the funds.
- Non-Cash Donations: Donating appreciated stock or other assets can provide a double benefit — you get a charitable deduction, and you avoid paying capital gains tax on the appreciated value.
4. Accelerate Deductions and Delay Income
If you’re a business owner or have control over your income timing, consider accelerating deductions and deferring income:
- Prepay Expenses: Pay deductible expenses, such as property taxes or medical bills, before the year ends to claim the deduction for 2024.
- Defer Income: If possible, delay income until January 2025, pushing the tax liability into the next year. This strategy is especially effective if you anticipate being in a lower tax bracket next year.
5. Review Your Health Savings Account (HSA)
HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. For 2024, the contribution limits are:
- $4,150 for individuals with self-only coverage
- $8,300 for families
- An additional $1,200 catch-up contribution if you’re 55 or older
Contributing the maximum amount by year-end can lower your taxable income and help you save for future medical expenses.
6. Take Advantage of Business Deductions
For business owners, there are several year-end deductions and credits to consider:
- Section 179 Deduction: If you’ve purchased equipment or software for your business, you may be able to deduct the full cost in 2024 under Section 179. The maximum deduction limit is $1.2 million for the year.
- Bonus Depreciation: This allows you to deduct a percentage of the cost of certain property. For 2024, the bonus depreciation rate is 80%, providing a significant tax-saving opportunity.
- Business Expense Review: Conduct a review of your business expenses to ensure you’re claiming all eligible deductions, such as home office expenses, mileage, and professional fees.
7. Check Your Withholding and Estimated Tax Payments
To avoid penalties for underpayment of taxes, ensure that you have paid at least:
- 90% of your 2024 tax liability, or
- 100% of your 2023 tax liability (110% if your AGI was over $150,000)
If necessary, make additional estimated tax payments by the January 15, 2025, deadline to avoid underpayment penalties.
8. Leverage Education Tax Benefits
If you’re paying for higher education expenses, consider maximizing the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit:
- AOTC: Provides up to $2,500 per eligible student for qualified education expenses, with a phase-out starting at MAGI of $160,000 for married filing jointly ($80,000 for single filers).
- Lifetime Learning Credit: Offers up to $2,000 per return for education expenses, with a phase-out starting at MAGI of $144,000 for married filing jointly ($72,000 for single filers).
These credits can reduce your tax liability dollar-for-dollar, so make sure you’re taking full advantage.
9. Utilize the Annual Gift Tax Exclusion
If you’re planning to gift money or assets, you can give up to $18,000 per recipient without triggering the gift tax. Gifting assets to family members or loved ones can be a strategic way to reduce your taxable estate while transferring wealth.
10. Consult a Tax Professional
Tax laws are complex and constantly changing, so it’s essential to work with a qualified tax advisor who can tailor strategies to your specific situation. At High Impact CPA, we offer comprehensive tax planning services to help you make the most of these opportunities and more. Our expert team can help you:
- Analyze your financial situation and identify tax-saving opportunities
- Develop a customized year-end tax plan
- Ensure compliance with the latest tax laws and regulations
Final Thoughts
Year-end tax planning requires a proactive approach. By implementing these strategies before December 31, you can significantly reduce your tax liability for 2024 and set yourself up for a more favorable financial outcome next year. Don’t wait until the last minute — reach out to High Impact CPA today for personalized advice and support in navigating your year-end tax planning.
Contact Us to schedule a consultation and start planning for a successful 2024 tax season.
