5 Year-End Tax-Saving Moves: Planning Now to Lower Your Tax Bill and Bolster Your Savings

As 2024 draws to a close, it’s time to review your financial situation and implement strategies that could significantly reduce your tax bill. Proactive planning now can lead to meaningful savings when tax season arrives.

Here are five essential tax-saving moves to consider before December 31, 2024.

1. Remember December 31: Key Deadlines for Tax-Advantaged Accounts

While most people associate April 15 with taxes, December 31 is an equally critical date for many tax-saving opportunities. Mark this date to take advantage of key contribution deadlines and other financial milestones.

Maximize Contributions to Retirement Plans

For workplace retirement plans like 401(k)s or 403(b)s, contributions for 2024 must be made by December 31. The contribution limit for these accounts is $23,000, with an additional $7,500 catch-up contribution allowed if you are aged 50 or older. Traditional contributions to these accounts reduce your taxable income dollar for dollar, providing immediate tax benefits while growing your retirement savings.

Fund a 529 College Savings Plan

Contributions to a 529 plan by December 31 may qualify for a state income tax deduction, depending on your state of residence. You can contribute up to $18,000 per person, per beneficiary in 2024 without triggering federal gift tax. Moreover, you can front-load up to five years’ worth of contributions, allowing you to contribute up to $90,000 per person, per beneficiary this year. Note that while 529 contributions aren’t deductible on your federal tax return, they can be a smart way to reduce your state tax burden and plan for future educational expenses.

Don’t Miss Your RMDs

If you’re 73 or older, you must take your required minimum distribution (RMD) from traditional IRAs, 401(k)s, and similar accounts by December 31 to avoid a hefty penalty. Failing to meet the RMD deadline could result in a penalty of 25% of the missed amount, though this can be reduced to 10% if corrected within two years. First-time RMD takers can delay until April 1 of the following year, but this could result in two distributions in the same year, potentially increasing your taxable income. Plan carefully to minimize your tax impact.

2. Consider Itemizing Your Deductions

While fewer than 10% of taxpayers itemize, it’s worth considering if your deductions exceed the standard deduction for 2024—$14,600 for single filers and $29,200 for married couples filing jointly. The standard deduction will increase slightly in 2025, so review your potential deductions now.

Key Categories of Itemizable Deductions:

• Medical Expenses: These must exceed 7.5% of your adjusted gross income (AGI) to be deductible.
• Home Mortgage Interest: Interest on qualified mortgages can be deducted.
• State and Local Taxes (SALT): Capped at $10,000 annually, this includes property taxes and state income taxes.
• Charitable Contributions: Donations to qualified charities can be deducted, but limits apply based on your AGI.
• Theft and Casualty Losses: Only losses from federally declared disasters are deductible.

If you plan a significant charitable donation or incurred large medical expenses this year, itemizing may yield greater tax savings compared to taking the standard deduction.

3. Make the Most of Losses

Tax-loss harvesting can help offset gains and reduce your taxable income. This strategy involves selling investments in non-retirement accounts that have declined in value to realize a loss.

How It Works:

• Realized losses first offset realized gains.
• Additional losses can offset up to $3,000 of ordinary income per year, depending on your filing status.
• Any unused losses can be carried forward indefinitely.

Special Consideration for Cryptocurrencies

Wash-sale rules, which prohibit repurchasing the same or a substantially identical security within 30 days of selling it at a loss, do not currently apply to cryptocurrencies. This loophole allows you to sell and immediately repurchase digital assets to realize losses without affecting your investment portfolio. However, this rule could change in the future, so consult a tax professional to stay informed.

If you’re working with a financial advisor, they may already be optimizing your tax-loss harvesting opportunities. If you’re managing your investments independently, professional advice can help you navigate the rules and maximize your benefits.

4. Explore Roth Conversions

With tax rates currently at historic lows, 2024 could be an opportune time to consider a Roth conversion. This involves transferring funds from a traditional IRA to a Roth IRA. While you’ll pay taxes on the converted amount, future withdrawals from the Roth IRA can be tax-free, provided you meet certain conditions.

Benefits of Roth Conversions:

• No required minimum distributions during your lifetime.
• Potentially lower taxes on converted funds if your income is lower this year.
• Tax-free withdrawals for qualified distributions after meeting the 5-year rule.

Backdoor Roth IRAs for High Earners

If your income exceeds the Roth IRA contribution limits, consider a backdoor Roth IRA. This strategy involves making nondeductible contributions to a traditional IRA and then converting the funds to a Roth IRA. Be mindful of the pro-rata rule, which may affect the taxability of your conversion. Consulting with a tax advisor can help you determine if this move aligns with your financial goals.

5. Optimize Gifting and Charitable Giving

The annual gift tax exclusion for 2024 allows you to give up to $18,000 per recipient without triggering gift tax. Couples can jointly gift $36,000 per recipient. Gifting can reduce your taxable estate and benefit loved ones or charitable organizations.

Charitable Contributions

• Donor-Advised Funds (DAFs): Contributing to a DAF allows you to claim an immediate tax deduction while recommending grants to charities over time.
• Appreciated Assets: Donating stocks, bonds, or mutual funds held for more than a year can help you avoid capital gains tax while providing a charitable deduction based on the asset’s fair market value.

If you’re considering large gifts or donations, consult a tax professional to ensure compliance with IRS regulations and maximize your tax benefits.

Final Thoughts: Proactive Planning Pays Off

Taking these tax-saving steps before December 31 can help you minimize your tax burden and set the stage for a financially successful 2025. Everyone’s tax situation is unique, so working with a financial advisor or tax professional can help tailor these strategies to your specific needs.

By planning ahead, you’ll not only lower your tax bill but also strengthen your overall financial health. Don’t wait until the last minute—start implementing these moves today and reap the rewards in the new year!