PREPARING FOR THIS YEAR’S TAXES
As the end of 2024 quickly approaches and we prepare to usher in a new year, it’s a reminder that tax time is just around the corner. Now is the perfect time to review your finances to see if you may benefit from some strategic tax planning. Here are eleven tips that may help you save money.
- Review your income, deductions, and gains/losses for the year. You may determine that it would be beneficial to advance or defer income, deductions, and gains or losses between 2024 and 2025. For instance, if you are close to moving into a higher tax bracket in 2024, you may want to delay an end-of-year bonus until 2025. Or, if you expect to be in a higher tax bracket in 2025, you may want to withdraw from taxable accounts earlier.
- Review tax withholding and estimates to determine if additional amounts should be paid to avoid underpayment penalties. You can work with your tax preparer to determine if your withholding and tax payments are on target for the year. The IRS also has a tax withholding estimator that can help you determine if making adjustments to the amount of money you have withheld from your paycheck might help you to avoid owing a large tax bill in April. If necessary, you can file a new W-4 with your employer or pay estimated tax payments. Fourth quarter estimates have a due date of January 15, 2025.
- Determine if you may be able to bunch deductions. When calculating your taxable income, you subtract the greater of the standard deduction or your itemized deduction. Most people take the standard deduction. For 2024, the standard deduction amount is $14,600 for individuals and $29,200 for couples filing jointly (higher if you are over age 65 or blind). Itemized deductions include your medical expenses, real estate taxes and state income taxes (capped at $10,000) and charitable contributions. To bunch your deductions, you would make several years’ worth of charitable contributions in a single year and forego making donations for a few following years or accelerate your medical expenses. Depending on how much you contribute or spend in itemized deductions, if you bunch your deductions, it is possible that you may get over the standard deduction amount and can itemize your deductions.
- Annual Gifting. The 2024 gift tax exclusion amount is $18,000. If you gift money or securities to someone else, you may be subject to filing a gift tax return and reducing your lifetime gifting amount. You could make several gifts to different people, and provided they are under $18,000 each this year, will not be subject to gift tax filing. Married couples can gift $36,000 in 2024 to each recipient.
- College 529 Plan Contributions. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans allow for tax-free growth and tax-exempt withdrawals as long as the funds are used to pay for qualified educational expenses. While contributing to a 529 plan before the year is over won’t reduce your federal taxes, it may lower your state taxes. Certain states, including New York, offer an income tax deduction up to a set dollar amount for contributions made to their 529 plan in a given year.
- Maximize retirement plan contributions. For those who build their retirement savings in a 401(k) or 403(b) through an employer and have contributions made through payroll deductions, your account administrator can help you review your balances and determine if you are on track to max out your eligible limits for the year. You can contribute up to $23,000 to a 401(k) or 403(b) in 2024. For those age 50 or older, you can add an additional $7,500 in catch-up contributions. Consider increasing contributions if your situation allows.
- Tax-Loss Harvesting. Investors can use tax-loss harvesting, also known as tax-loss selling, for savings. By selling an investment in a taxable account that shows a loss in value, you can offset capital gains taxes that are due on profits from other investments. Your realized losses first offset realized gains, then you can claim up to $3,000 of capital loss and carry additional loss forward into following years. However, it is key to follow IRS regulations and avoid a “wash sale.” To benefit from tax-loss harvesting, you cannot sell or trade a security at a loss, and within 30 days before or after buy the same or substantially identical security. That would be considered a “wash sale” and would prevent you from being able to use that loss to reduce tax liability.
- Required Minimum Distributions (RMDs). RMDs are the minimum amounts you must withdraw from your retirement accounts each year or face steep penalties. Beginning in 2024, the SECURE 2.0 Act raised the age that you must begin taking RMDs to age 73. If you were born in 1951, 2024 is your first distribution year as you reach age 73 in 2024.
- Consider a Roth Conversion. You may want to convert some of your traditional IRA to a Roth IRA. The amount converted is subject to tax for the year of conversion, but there are no income limits for conversions and Roth accounts grow tax free.
- For those who are 70 ½ and over, consider charitable giving from IRAs. You can make Qualified Charitable Distributions (QCDs) by directly transferring funds to a qualified charity, and in turn, keep your taxable income lower.
- Charitable Giving with Appreciated Stock. Consider leveraging your charitable giving by donating long-term appreciated securities directly to charity, instead of gifting cash. The benefit of gifting securities is that generally you can take a tax deduction for the full fair market value of the securities, instead of selling the securities and gifting the after-tax proceeds. As an alternative to gifting directly to the charity, you could set up a donor-advised fund which is like your personal charitable investment account that you can then use to support the qualified charities of your choice.
Each person has their own unique financial circumstances and not every tip will apply to every situation. It can be helpful to speak with a financial professional who can determine a tax strategy that best suits your needs. If you have any questions, please contact us.
