Year-End Tax Planning: Strategies to Maximize Your Savings

As the end of the year approaches, there are several steps you can take to manage your tax bill effectively. While the tax deadline may still be a few months away, it's helpful to take action now to make the most of available opportunities and potentially reduce your tax liability. Here are the actions you should consider taking before December 31, and those you can address by April 15, 2025.

Tasks to Complete by Year-End

1. Take Required Minimum Distributions (RMDs)‍

If you’re between 70-73 (or older), you generally need to withdraw minimum distributions from your tax-deferred retirement accounts by the end of the year. Missing this deadline could lead to a tax penalty on the amount you failed to withdraw. The custodian where your account is held should be able to provide you with an RMD calculation.

Additionally, if you've inherited an IRA, you may be required to take RMDs depending on your situation. Call your custodian and/or speak to a financial professional to determine if you need to take an RMD and if so, what the amount for the year is.

2. Maximize Your 401(k) Contributions

‍Contributing the maximum amount to your tax-deferred 401(k) can help lower your taxable income for the year. For 2024, the maximum contribution is $23,000, or $30,500 if you’re 50 or older.

3. Contribute to a Roth 401(k)

‍If your employer offers a Roth 401(k) option, and you haven’t maxed out your traditional 401(k), you can make after-tax contributions up to the limit ($23,000 or $30,500 if 50 or older), minus any traditional 401(k) contributions.

If you're unsure whether a traditional or Roth 401(k) is best for your situation, consider speaking with a financial advisor.

4. Consider a Backdoor Roth and/or Roth Conversion‍

If your income is too high to contribute directly to a Roth IRA, you might consider converting a traditional IRA to a Roth IRA. This move allows you to enjoy tax-free withdrawals in retirement. Be mindful of the tax implications of this conversion and ensure you stay within your current tax bracket to avoid a hefty tax bill.

5. Explore a Mega Backdoor Roth‍

If your workplace plan allows, you can take advantage of the mega backdoor Roth strategy. This involves making after-tax contributions to your 401(k) up to the overall limit ($69,000 or $76,500 if 50 or older) and then converting these contributions to a Roth IRA.

6. Optimize Planned Donations & Gifting‍

If you’re going to itemize your taxes and you're planning to make charitable donations, doing so before the year ends can maximize your tax benefits. You can generally deduct cash donations to qualified charities up to 60% of your adjusted gross income (AGI). Donating appreciated investments can be even more tax-efficient. Additionally, if you’re 70½ or older, consider making a Qualified Charitable Distribution (QCD) from your IRA, which can satisfy your RMD requirements without adding to your taxable income.

Another strategy to consider if you donate annually, is to make your upcoming year's donations during the current calendar year as well. For example, if you plan to give $5,000 in 2024 and another $5,000 in 2025, you may benefit more by donating $10,000 every other year.

In 2024, you can also give up to $18,000 ($36,000 if married) per person as a gift without impacting your lifetime estate and gift-tax exemption. While this won’t affect your taxable income for the year, it’s a great way to transfer wealth to your heirs tax-free.

7. Review Incentive Stock Options (ISOs) and/or Non-qualified Stock Options (NSOs)‍

If you have stock options, exercising them strategically at year-end can help manage your tax bracket and avoid a higher tax bill. Alternatively, if you've exercised too many options and owe Alternative Minimum Tax (AMT), strategically sell off shares to get you out of the AMT brackets. This can be a complex calculation; you may wish to speak to an advisor or tax pro.

8. Harvest Tax Losses‍

The end of the year is a great time to review your investment portfolio. By selling certain investments at a loss, you can offset capital gains and potentially reduce your tax liability. If you don't have any capital gains, you can take up to $3,000 of losses against your ordinary income (if you're in the 24% federal tax bracket, that would save you $720 in taxes!). Just be sure not to repurchase the same or similar investments within 30 days to avoid wash-sale rules.

9. Medical Expenses

If you're itemizing taxes, medical expenses over 7.5% of your AGI are deductible - if you have any last minute appointments to tack on, get those done before 12/31!

Regardless of itemizing, if you’ve met your deductible for the year, that’s another great reason to get things done before 12/31.

If you have an FSA (NOT an HSA), use any remaining funds before they expire.

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Tasks to Complete before the Tax Deadline

1. Maximize Contributions to Tax-Deferred Accounts

‍You have until the tax deadline to make contributions to accounts like Health Savings Accounts (HSAs) and Traditional IRAs. For 2024, you can contribute up to $4,150 ($5,150 if 55 or older) to HSAs, and up to $8,300 ($9,300 if 50 or older) to Traditional IRAs.

2. Contribute to a Roth IRA

‍Roth IRA contributions are made with after-tax dollars and won’t reduce your taxable income, but they offer tax-free withdrawals in retirement. Ensure you stay within the income limits: the contribution limit phases out for incomes between $146,000 and $161,000 (or $230,000 and $240,000 for couples).

A Final Thought

By addressing these tasks before the end of the year, you can take proactive steps to manage your tax bill and potentially enhance your financial situation. If you have questions or need personalized advice, consider reaching out to a financial advisor for support.