As the year comes to a close, it's critical to evaluate your financial condition and make smart decisions to reduce your tax obligation. With a little organization and awareness, you may take advantage of a number of tax-saving alternatives. Here are a few last-minute measures to explore before the end of the year.
If you itemize deductions, paying outstanding medical bills may reduce your taxable income if the sum of all medical expenditures paid for the year exceeds 7.5% of your adjusted gross income. Even if you don't have the cash on hand, you may pay these payments using a credit card before the end of the year and deduct them from your current tax return. This method is especially useful if you have incurred high medical bills this year.
Consider prepaying your second payment of property taxes. This might enhance your current-year itemized deductions. Keep in mind that state and local tax (SALT) deductions, which include property taxes, are limited to $10,000. If you are already near to the limit, prepaying may not bring any further tax savings.
Making charitable donations allows you to lower your taxable income while also supporting issues you care about. If you only itemize somewhat each year, try "bunching" your deductions. This entails focusing your charitable donations and other deductible costs in a single year to surpass the standard deduction level, enabling you to itemize. You may take the standard deduction in alternate years.
If you're 73 or older in 2024, you must withdraw required minimum distributions (RMDs) from your retirement funds by December 31, 2024, or face significant penalties. Failing to take the RMD may result in a 25% penalty on the amount that should have been withdrawn. To prevent incurring needless fees, make sure you satisfy this condition.
If you reach 73 in 2024, you may put off your first RMD until April 1, 2025. This might be useful if you have a high income in 2024 but foresee a lower income the following year. Delaying the distribution may allow you to decrease your tax obligation by receiving it in a year when you are in a lower tax band.
If you opt to postpone the first RMD, you must make two distributions in the second year: the delayed first RMD on April 1 and the second year's RMD by December 31.
Transferring monies from a conventional IRA to a qualifying charity organization directly by the IRA trustee is tax-free for individuals aged 70½ and above. The yearly limit for these transactions was formerly $100,000 per IRA owner, but the legislation was altered to make the annual maximum inflation adjusted. In 2024, an IRA owner may make qualifying charitable donations of up to $105,000. If you are obliged to make an IRA distribution (i.e., you are 73 or older), you may have it transferred straight to an eligible charity, and the amount will be included as your RMD for the year.
Although you will not get a tax deduction for the transferred amount, this qualified charitable donation (QCD) will be excluded from your income, potentially lowering the amount of your Social Security payments that are taxed. Furthermore, since your adjusted gross income will be smaller, tax credits and some deductions subject to phase-outs or restrictions based on AGI may be affected positively.
If you want to make a QCD, notify your IRA trustee or custodian well in advance of December 31 so that they may execute the transfer to the charity. Your QCD does not have to be donated to just one charity; you may distribute it to as many organizations as you choose, as long as the amount does not exceed the yearly maximum. Don't forget to request a receipt or letter of recognition from the charity to which you have given.
If you have contributed to your conventional IRA since 70½, the amount of the QCD that isn't taxable may be restricted. Check with this office to determine how your tax might be affected.
Increase your contributions to retirement accounts such as IRAs and 401(k). Contributions to these accounts may help lower your taxable income, and the money grow tax-free. For 2024, the 401(k) contribution maximum is $23,000, with an extra $7,500 catch-up contribution for people over the age of 50. The IRA contribution maximum is $7,000, with a $1,000 catch-up contribution for those over the age of 50.
If you own underperforming equities, try selling them to realize a loss. This approach, known as tax loss harvesting, may balance capital gains and lower taxable income. Keep in mind the "wash sale" rule, which states that if you buy the same or nearly similar securities within 30 days, you cannot claim a deduction.
Check your paycheck withholdings and projected tax payments to ensure you are not underpaying taxes. If you discover that you have underwithheld, consider raising your withholdings for the remaining pay periods or making an anticipated tax payment to prevent or reduce underpayment penalties. Withholdings have the benefit of being viewed as paid ratably throughout the year, which may compensate for underpayments made earlier in the year. Other withholding tactics are available; contact this office for further information.
If you contributed too little to meet expenditures this year, you may want to raise the amount you put away for next year. The maximum donation amount for 2025 is $3,300.
If you still have a balance in your employer's health flexible spending account (FSA), be sure to utilize it before the year closes. FSAs usually feature a "use-it-or-lose-it" policy, which means that any unused money may be lost. You may carry over $640 from 2024 to 2025, but you must utilize it during the first 2½ months of 2025. Any fraction that is utilized is lost.
If you become eligible to make health savings account (HSA) contributions late this year, you may make a full year's worth of deductible HSA contributions, even if you were not eligible for HSA contributions all year. This chance is available even if you become eligible in December. An HSA allows for deductible contributions (within IRS restrictions), tax-deferred profits, and tax-free disbursements for qualified medical expenditures.
If you qualify for American Opportunity or Lifetime Learning education credits, calculate how much you will have paid in eligible tuition and associated expenditures by 2024. If it is not the maximum permitted for credit calculation, you may prepay 2025 tuition for an academic session commencing in the first three months of 2025. This will enable you to enhance the credit in 2024. This is particularly beneficial for students who are just beginning college and only have tuition fees for a portion of the year.
If your income is exceptionally low this year, you might consider the following:
To see whether you may take advantage of this tax-saving opportunity, you must first evaluate if your taxable income will fall below the threshold for the 15% capital gains tax rate. In 2024, the 15% tax rate begins at $94,051 for married taxpayers filing jointly, $63,001 for individuals filing as head of household, and $47,026 for others.
Suppose a married couple files jointly and has an expected taxable income of $50,000 in 2024. Married joint filers have a 15% capital gains tax rate threshold of $94,051. That implies they may add $44,050 ($94,050- $50,000) in long-term capital gains to their income while paying no tax on them.
Furthermore, if the taxpayer owns any loser stocks, he or she may sell them for a loss, allowing further long-term capital gains to be taxed at zero.
Contact our office for help devising a strategy to take advantage of the zero capital gains tax.
Though donations to persons are not tax deductible, you may make gifts to individuals up to an annual maximum amount without paying any gift tax or submitting a gift tax return. For the tax year 2024, you may donate $18,000 ($19,000 in 2025) to as many individuals as you wish without paying gift tax. If you wish to do this, make sure you do it before the end of the year, since you cannot take the $18,000, or any unused portion of it, into 2025. Such presents do not need to be in cash, and the receiver does not have to be a related. If you are married, you and your spouse may both donate the same individual up to $18,000 (a total of $36,000) without having to file a gift tax return or pay any gift tax.
By applying these measures, you may improve your financial situation and reduce your tax burden. Remember that tax preparation is a year-round process, and these last-minute adjustments are just one component of a complete tax strategy.