As 2024 comes to a close, it’s the perfect time to review your finances and maximize your tax savings. Year-end tax planning is an essential step in minimizing liabilities and keeping more of what you earn. Here are some effective tax planning tips to help you finish the year on the right financial note.
We’ve discussed Tax Loss Harvesting in the past as a possible strategy for investors with depreciating assets. Let’s explore more options for dealing with taxable assets.
1. Maximize Contributions to Tax-Advantaged Accounts
401(k) Contributions: Contributions to a 401(k) reduce your taxable income for the year. In 2024, you can contribute up to $23,000 if you’re under 50, and up to $30,500 if you’re 50 or older.
IRAs: Consider contributing to a traditional IRA, which may also be tax-deductible. For 2024, the contribution limit is $7,000 (or $8,000 if you’re 50 or older).
Health Savings Accounts (HSAs): If you have a high-deductible health plan, you can contribute to an HSA and enjoy tax-free contributions, earnings, and withdrawals for medical expenses. For 2024, the contribution limit is $4,150 for individuals and $8,300 for families.
2. Review Your Investment Portfolio
Harvest Capital Losses: Offsetting gains with capital losses is a powerful tax-saving strategy. If you have underperforming investments, consider selling them to realize losses, which can reduce capital gains tax. In 2024, up to $3,000 in net losses can be deducted from other income.
Maximize Tax-Efficient Investments: Consider placing income-generating investments (like bonds) in tax-advantaged accounts and growth-focused investments (like stocks) in taxable accounts. This helps manage the impact of taxes on your returns.
3. Optimize Charitable Contributions
Donate Cash or Appreciated Assets: Charitable donations are a win-win. Donating cash or appreciated stocks can provide a deduction if you itemize. Donating appreciated assets also avoids capital gains tax, amplifying the tax benefit.
Use a Donor-Advised Fund (DAF): If you’re looking for flexibility, a DAF allows you to make a charitable contribution now, claim an immediate tax deduction, and decide later which charities to support.
4. Manage Your Income and Deductions
Defer Income: If you anticipate being in a lower tax bracket next year, consider deferring income until January. This includes year-end bonuses or other sources of income that can be delayed.
Bunch Deductions: If your total itemized deductions are close to the standard deduction, bunching deductions can help. For example, you could pay two years' worth of property taxes or charitable contributions in one year to maximize the deduction.
5. Maximize Available Credits
Energy-Efficient Home Improvements: Consider making energy-efficient upgrades to your home before year-end to qualify for tax credits. The 2024 credits include certain heating, cooling, and energy-efficient home improvements.
Education Credits: If you or your dependents are in school, check for available education credits like the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. These credits can reduce your tax bill dollar-for-dollar.
By implementing these strategies before the year ends, you can make a meaningful impact on your tax savings. At LPSC Financial, we’re here to guide you through these tax planning strategies to maximize your financial well-being. Reach out for personalized advice tailored to your needs and goals.
Sources:
IRS - Retirement Topics Contribution Limits
Fidelity - Tax-Loss Harvesting
LPSC Financial - Tax Loss Harvesting
IRS - Health Savings Accounts and Other Tax-Favored Health Plans
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult with a tax or legal professional regarding their individual situations.