Year-End Tax Planning: Key Steps to Take Before the Year Ends

 

Written by: Scott Strohecker, CFP®, EA

 

Click here for our 2024 Year End Tax Planning Checklist

 

As the year comes to a close, it is important to understand proactive tax planning for 2024, 2025, and beyond. While we expect the tax landscape to change in the upcoming year with the re-election of Donald Trump, there are still several key steps to take for this year.

Maximize Retirement Contributions

Take full advantage of tax-advantage retirement accounts:

• 401(k) and 403(b) Contributions: Make sure you are contributing enough to take full advantage of any employer match, and on top of that, consider increasing your contributions to the annual limit. For 2024, the limit is $23,000, and if you are 50 or older, you can make catch-up contributions up to $7,500. Next year (2025), the base amount goes up $23,500 while the catch-up remains at $7,500. However, there is a new “Mega” catch-up contribution limit next year, for anyone between the ages of 60 to 63. In 2025, anyone aged 60, 61, 62, or 63 will be able to contribute up to $11,250 rather than the $7,500. This “mega catch up” was part of SECURE 2.0, but didn’t take effect until the 2025 tax year. The key to remember is it is dependent on your age at the end of the calendar year.
• IRA Contributions: You have until April 15, 2025, to contribute to your Traditional or Roth IRA. The annual contribution limit is $7,000 or $8,000 if you are 50 or older. It is important to understand your eligibility rules especially as to whether your contribution to a traditional IRA is deductible or not and the income limits for a Roth IRA contribution.
• Health Savings Account (HSA) Contributions: A Health Savings Account is arguably one of the best accounts to have because of the triple tax advantage – that is contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. If you have self only coverage, you can contribute up to $4,150 for 2024. Next year, that increases to $4,300. If you have family coverage, you can contribute up to $8,300 for 2024. Next year, that increases to $8,550. Regardless of your coverage, if you are 55 and over, you can make an additional $1,000 catch-up contribution.

 

Distribution Planning

Some accounts have a year-end deadline for distributions, so ensure you plan accordingly.

• Required Minimum Distribution (RMD): If you are subject to a required minimum distribution from your retirement account(s), the distribution must occur before the end of the year to avoid a 25% penalty. You generally must start annual distributions once you reach age 73.
• Flexible Spending Accounts (FSA): If you have a Flexible Spending Account for medical and dependent care expense, review your balance and eligible expenses. Many FSAs are “use it or lose it”, meaning unused funds could be forfeited.
• Roth Conversion: Doing a Roth conversion can be a great planning tool. You need to fully understand your situation to know whether doing one is right for you. Any Roth conversion must be completed before the end of the year.

Gifting

If you are in a position to gift to family or a qualified charity, you should consider the following year-end gifting strategies:

• Annual Gift Exclusion: You can give up to $18,000 per recipient in 2024 ($36,000 for married couples) without triggering gift taxes. Next year, that goes up to $19,000.
• 529 Plan Contributions: Contributions to a 529 plan can be a great way to reduce your taxable estate and fund education expenses for a child or grandchild. With recent rule changes, 529 plans are more flexible than ever before.
• Qualified Charitable Distributions (QCDs): If you are 70.5 or older, you can donate money directly from your IRA to a charity without paying taxes on the distribution.
• Donor-Advised Fund: Consider using a donor-advised fund to get an immediate tax deduction while allowing you to distribute funds to charities in the current or future years. You could fund the account with a few years’ worth of your typically charitable donation.
• Appreciated Assets: Donating appreciated assets like stocks can offer a double tax benefit – avoiding capital gains taxes and receiving a charitable deduction for the asset’s full market value. This is a particularly great strategy if you have a concentrated stock position and are charitably inclined. You should avoid gifting appreciated assets to individuals like family members because they will inherit your cost basis.

Check Your Withholding and Estimated Taxes

Now is a good time to check whether you are on track to avoid an unexpected tax bill in April. An unexpected tax bill is never fun especially if it includes penalties and interest for underpayment, which could have been avoided. Here is what to do to ensure no avoidable surprises:

• Review Withholding: Use the IRS withholding calculator to see if you should update your W-4. If you work with an accountant or tax advisor, you can also consult them to do a projection to see if any adjustment is needed.
• Estimated Payments: If you are self-employed or have significant non-wage income, make sure your quarterly estimated payments are on track. The final estimated payment for 2024 is due January 15^th, 2025.

Final Thoughts

Year-end tax planning can be complex especially with the possibility of new tax policies on the horizon. By reviewing your finances now, maximizing available tax benefits, and seeking professional guidance, you can take charge of your tax situation and set yourself up for financial success in the coming year.

Remember, effective tax planning is not just about avoiding taxes – it is about positioning yourself for long-term financial stability.

If you have any questions about how the recent election might impact your finances or if you need help with year-end tax planning, please contact our office to be connected with one of our trusted financial advisors.