As December 31st approaches, individuals and businesses alike are racing against the clock to optimize their tax positions for the year. Proper planning and timely actions can significantly reduce your tax liability and set you up for a financially sound new year. Here are actionable strategies to help you maximize your savings before the clock strikes midnight on New Year’s Eve.
1. Maximize Contributions to Retirement Accounts
Contributing to retirement accounts is one of the most effective ways to lower your taxable income. Here are some key opportunities:
- 401(k) Contributions: You can contribute up to $22,500 for 2024 (or $30,000 if you’re 50 or older) to your employer-sponsored 401(k). Check with your HR department to make catch-up contributions if you’re behind.
- Traditional IRA Contributions: Eligible taxpayers can contribute up to $6,500 (or $7,500 if 50 or older) to a traditional IRA. Contributions may be tax-deductible depending on your income level and participation in other retirement plans.
- Self-Employed Retirement Accounts: If you’re self-employed, consider maxing out contributions to SEP IRAs or Solo 401(k)s, which have higher limits and allow for significant tax-deferred savings.
2. Harvest Tax Losses
If your portfolio includes underperforming investments, now is the time to consider tax-loss harvesting. This strategy involves selling investments at a loss to offset capital gains realized earlier in the year. Here’s how it works:
- Offset Gains: Use losses to offset capital gains from other investments. If your losses exceed your gains, you can deduct up to $3,000 from your ordinary income.
- Avoid the Wash-Sale Rule: Be careful not to repurchase the same or substantially identical investment within 30 days, as this could disqualify the tax benefit.
Consult with a financial advisor to ensure this strategy aligns with your long-term investment goals.
3. Make Charitable Contributions
December is a season of giving, and charitable donations can also provide a significant tax benefit. Consider the following:
- Cash Donations: Contributions to qualified charities are deductible if you itemize your deductions. For 2024, ensure your donation receipts are dated before December 31st.
- Donating Appreciated Assets: Donating appreciated stocks or other assets allows you to avoid capital gains taxes and claim a deduction for the asset’s fair market value.
- Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can direct up to $100,000 from your IRA to a charity tax-free, satisfying your required minimum distribution (RMD) for the year.
4. Defer Income and Accelerate Deductions
Timing your income and expenses strategically can make a big difference:
- Defer Income: If you’re self-employed or have control over the timing of your income, consider deferring it to 2025 to reduce your current year’s tax liability.
- Accelerate Deductions: Pay deductible expenses now, such as mortgage interest, medical bills, or state and local taxes (keeping in mind the SALT cap of $10,000).
5. Utilize Tax Credits
Tax credits reduce your tax bill dollar for dollar, making them more valuable than deductions. Here are a few to consider:
- Residential Energy Credits: If you’ve made energy-efficient home improvements or installed renewable energy systems like solar panels, you may qualify for significant credits.
- Child Tax Credit (CTC): Ensure you’ve claimed the full CTC if eligible. For 2024, the maximum credit remains $2,000 per qualifying child.
- Education Credits: If you or a family member is pursuing higher education, credits like the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC) can help.
6. Review Flexible Spending Accounts (FSAs)
If you have an FSA, check your balance to ensure you don’t lose unused funds. Many FSAs have a "use it or lose it" policy, although some employers allow a small carryover or grace period. Spend the funds on eligible medical expenses, such as:
- Prescription medications
- Vision and dental care
- Over-the-counter treatments
7. Take Advantage of Business Deductions
For business owners, December is the last chance to claim deductions that reduce taxable income. Consider:
- Equipment Purchases: Take advantage of Section 179 expensing or bonus depreciation for business equipment purchased and placed in service before year-end.
- Prepaying Expenses: Prepaying certain business expenses, such as rent, insurance, or utilities, can bring forward deductions into 2024.
- Hiring Credits: If you’ve hired employees from targeted groups, explore the Work Opportunity Tax Credit (WOTC).
8. Review Your Withholding and Estimated Taxes
Avoid surprises at tax time by ensuring you’ve paid enough taxes throughout the year:
- Review Form W-4: If you’ve had a significant life change (e.g., marriage, new job, home purchase), update your withholding.
- Make Estimated Payments: If you’re self-employed or have other income not subject to withholding, ensure you’ve made sufficient estimated tax payments to avoid penalties.
9. Consult a Tax Professional
Tax laws change frequently, and navigating them can be complex. A qualified tax professional can:
- Identify deductions and credits specific to your situation.
- Help you implement advanced tax strategies.
- Ensure compliance with the latest tax regulations.
Working with a professional ensures that you maximize your savings while minimizing the risk of errors or audits.
Start Now to Save Later
Don’t wait until the last minute to implement these year-end tax strategies. By taking proactive steps today, you can lower your tax bill, increase your savings, and start the new year on solid financial footing. If you’re unsure where to begin, Accuwise is here to help. Contact us today for personalized tax planning tailored to your needs.
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Disclaimer: This article is for informational purposes only and does not constitute legal, financial, or tax advice. Please consult with a professional for advice specific to your circumstances.
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