As the year comes to a close, now is the time to take proactive steps to minimize your tax liability.
By making strategic decisions and leveraging available opportunities, you can reduce your tax burden while maximizing savings. Whether it’s adjusting your investments, planning charitable donations, or reviewing deductions, here’s a comprehensive guide to help you reduce your tax bill before the end of the year.
Watch Episode 33 of Wealth Strategies Unleashed to get a refresher on this year’s tax strategies.
Maximize Your Retirement Contributions
One of the most effective ways to reduce your taxable income is to ensure you’re contributing to retirement accounts like a 401(k) or IRA.
These contributions are tax-deductible and can significantly lower your taxable income. Each dollar you contribute to a pre-tax workplace retirement plan reduces your taxable income by a dollar in the year you contribute.
You generally have until December 31 to contribute to your 401(k) or other tax-advantaged retirement accounts.
For 2024, the IRS has set the maximum 401(k) contribution limit at $23,000. If you’re 50 or older, you can take advantage of an additional $7,500 catch-up contribution, bringing your total potential contribution to $30,500 for the year.
If your employer doesn’t offer a retirement plan, consider contributing to an IRA. The 2024 IRA contribution limit is $7,000, or $8,000 for those 50 and older. Unlike a 401(k), you have extra time to contribute—until April 15, 2025, for the 2024 tax year.
Take Advantage of Tax-Loss Harvesting
If you’ve experienced investment losses this year, consider using them to offset capital gains. This strategy, known as tax-loss harvesting, can reduce your taxable income while keeping your portfolio on track.
Steps to Tax-Loss Harvest:
- Identify underperforming assets to sell.
- Use the losses to offset capital gains.
- Carry over unused losses (up to $3,000 annually) to future tax years.
Ideally, you should determine if you could benefit from selling underperforming assets before Dec. 31 to offset any potential capital gains.
Also, be mindful of the IRS’s wash-sale rule, which disallows repurchasing the same or similar investment within 30 days.
Before utilizing this year-end tax strategy, speak with a tax professional.
Read our blog post with the full breakdown of the tax planning tips to consider for 2024.
Review Charitable Giving Options
Giving back to the community can also provide you with valuable tax deductions.
However, there’s something to remember:
You must itemize your deductions to take advantage of the tax benefit. This means your charitable contributions, combined with other itemized deductions (such as mortgage interest or qualifying medical expenses that exceed a specific threshold), need to surpass the standard deduction for the year to reduce your tax liability.
Ways to Make Your Giving More Impactful:
- Instead of cash, donate stocks or other appreciated assets. This lets you avoid capital gains taxes while deducting the full market value.
- Contribute to a donor-advised fund and decide later which charities to support.
- For those over 73, consider a Qualified Charitable Distribution (QCD) from an IRA. This counts toward your Required Minimum Distribution (RMD) and can reduce taxable income.
Don’t Miss Your RMD Deadline
If you’re 73 or older, you must take Required Minimum Distributions (RMDs) from your retirement accounts by December 31.
Failing to do so can result in a steep penalty—up to 25% of the amount not withdrawn.
Key Facts About RMDs:
When Do RMDs Start?
You must begin taking RMDs by April 1 of the year following the calendar year you turn 73. After the first RMD, subsequent distributions must be taken by December 31 each year.
How Are RMDs Calculated?
The RMD amount is determined by dividing your retirement account balance as of December 31 of the prior year by a life expectancy factor published by the IRS.
Which Accounts Are Subject to RMDs?
RMDs apply to most tax-deferred retirement accounts. However, Roth IRAs are exempt while the account holder is alive.
