10 Ultimate Year-End Tax Planning Strategies for 2024
As the year-end approaches, smart tax planning becomes a critical tool for individuals looking to reduce their 2024 tax bill. Here’s what you need to know and actionable strategies to consider to make the most of current tax laws and optimize your financial position.
1. Optimize Your Income and Deductions Timing
Defer Income: If you expect to be in the same or a lower tax bracket in 2025, consider deferring income. This can include:
Postpone year-end bonuses
Delay business income
Defer rental payments or consulting fees
Accelerate Deductions: If you itemize, accelerating deductions helps. Key deductions to move up include:
Medical expenses
Mortgage interest
Charitable contributions
Example: Double up on charitable donations by contributing next year’s planned gifts before December 31 to maximize your deduction and reduce taxable income for 2024.
Use a FREE retirement calculator to set your savings goal
2. Maximize Retirement Contributions
Max Out IRA Contributions: For 2024, individuals can contribute up to $7,000 to a traditional IRA, with those aged 50 or older eligible to contribute up to $8,000. The deductibility of these contributions depends on your income level and access to employer-sponsored retirement plans. If you or your spouse are covered by a workplace retirement plan, income limits may phase out the deduction. For single filers, the deduction phases out between $77,000 and $87,000 of modified adjusted gross income (MAGI). For married couples filing jointly, the phase-out range is between $123,000 and $143,000 if the spouse making the IRA contribution is covered by a workplace plan.
Max Out 401(k): Employees can contribute up to $23,000 in 2024 if they are under 50. Those aged 50 and older can make catch-up contributions, raising the limit to $30,500. These contributions reduce taxable income, providing immediate tax benefits. Note that the combined limit for traditional and Roth 401(k) contributions cannot exceed these amounts.
Review Contributions to SEP and SIMPLE IRAs: For self-employed individuals and small business owners, SEP IRA contributions can reach up to 25% of compensation or a maximum of $69,000 in 2024. SIMPLE IRA contribution limits are $16,000 for those under 50, with an additional $3,500 allowed for those 50 and older.
Take RMDs on Time: For those aged 73 or older, taking Required Minimum Distributions (RMDs) by December 31 is essential to avoid a hefty 25% penalty (reduced from 50% under the SECURE 2.0 Act). The first RMD can be delayed until April 1 of the following year, but doing so requires taking two distributions in the same year, which can significantly increase taxable income. Roth IRAs owned by the original account holder are exempt from RMDs, providing more flexibility.
3. Consider Roth Conversions
A Roth conversion helps manage future tax burdens if you expect your tax rates to increase. By converting a traditional IRA or 401(k) to a Roth account, you pay taxes on the converted amount in 2024. However, future qualified withdrawals from the Roth account will be tax-free. This strategy can lock in current tax rates and provide tax-free income in retirement.
Timing is crucial when considering a Roth conversion. Converting in a year when your income is lower could minimize the immediate tax impact. Be mindful that a large conversion might push you into a higher tax bracket, triggering additional taxes. Consulting a tax advisor ensures that you carefully plan and balance the conversion to avoid unintended tax consequences.
4. Make Use of Gifting Strategies
Annual Gift Tax Exclusion: Gifting up to $18,000 per recipient in 2024 ($36,000 for married couples) allows you to transfer wealth tax-free. This strategy reduces your taxable estate and shifts future income growth to your beneficiaries. It is a simple yet effective way to support loved ones while lowering your estate's potential tax exposure.
Lifetime Gift and Estate Tax Exemption: The current lifetime gift and estate tax exemption for 2024 is $13.61 million per individual. This generous limit offers an opportunity to make significant gifts without triggering federal gift taxes. However, the exemption amount is set to drop after 2025, so taking advantage of it now could save substantial future taxes. Large gifts made before the exemption reverts can lock in these benefits.
5. Utilize Charitable Contributions
Qualified Charitable Distributions (QCDs): For individuals aged 70½ or older, contributing up to $105,000 directly from an IRA to a qualified charity satisfies RMD requirements without adding to taxable income. This strategy lowers taxable income and supports charitable causes without itemizing deductions.
Donor-Advised Funds: Donor-advised funds provide an immediate tax deduction while allowing flexibility in distributing the funds over time. This approach benefits those wanting to bunch charitable contributions into one tax year to surpass the standard deduction threshold.
Use a FREE retirement calculator to set your savings goal
6. Harvest Capital Losses
Offsetting capital gains with capital losses can reduce taxable income. By selling underperforming securities before December 31, you can use these losses to offset gains from other investments as well as reduce up to $3,000 of ordinary income if losses exceed gains. This tactic can help lower your overall tax bill.
Be cautious of the wash sale rule, which disallows claiming a tax deduction if you purchase substantially identical securities within 30 days before or after the sale.
7. Plan for Business Owners
Pass-Through Deduction: Business owners of pass-through entities such as partnerships or S corporations can qualify for the 20% Qualified Business Income (QBI) deduction. Aggregating business expenses into 2024 can help lower adjusted gross income, ensuring eligibility for the full deduction.
Bonus Depreciation: The 2024 tax year allows for a 60% bonus depreciation on qualifying new and used business assets placed in service. This accelerated depreciation provides an upfront expense deduction, reducing taxable income. Business owners should act now, as this percentage will decrease in future years.
8. Review Trust and Estate Plans
With the lifetime gift and estate tax exemption at a historic high, reviewing your estate plan becomes essential. Trusts can be leveraged to minimize estate taxes while preserving a step-up in basis for heirs.
Consider strategies that optimize your estate plan while maintaining flexibility. Reviewing beneficiary designations and trust provisions ensures your estate strategy aligns with current laws and your long-term goals. Consulting with an estate planner can help navigate complex rules and optimize tax outcomes.
9. Maximize Business Expense Deductions
Business owners may wish tocluster expenses into 2024 to lower taxable income. Eligible expenses include office supplies, maintenance costs, and professional services. Proper documentation is key to substantiating these deductions in case of an audit.
Prepaying for next year’s services or purchasing supplies before December 31 may allow you to claim the expense in 2024, boosting tax savings. This strategy helps small business owners manage their tax liability efficiently. Make sure to consult with your tax advisor.
10. Utilize Opportunity Zones
Reinvesting capital gains into qualified Opportunity Zones defers capital gains taxes and can reduce future tax liabilities. This strategy supports economic development in designated areas and provides significant tax benefits. Ensure compliance by confirming eligibility requirements and investment timelines with your tax advisor. Opportunity Zones offer a powerful tool for long-term tax planning and community investment.
Use a FREE retirement calculator to set your savings goal
Key Dates for Your Year-End Tax Planning
Awareness of key tax dates is vital to ensure timely action. Here are essential dates for your 2024 year-end tax planning:
October 15: Final due date for filing 2023 individual tax returns under extension. Ensure any remaining payments related to 2023 taxes are completed.
October 16: Last day to recharacterize a 2023 Roth conversion to a traditional IRA.
November 1: Recommended date to start requesting a 2024 pro forma tax return from your accountant. This estimate helps evaluate whether to accelerate or delay income and deductions.
November 29: Last date to “double up” on securities to maintain market exposure and harvest tax losses without violating the wash sale rule. Ensure you buy securities by this date to sell loss positions by December 31.
December 20: Last legislative day for Congress in 2024. Significant tax reforms are unlikely after this date.
December 31: Final day to complete RMDs, execute charitable contributions, make deductible expenses, and harvest capital losses. The equity markets close at 4 p.m. ET, and bond markets close at 2 p.m. ET.
Bottom Line
Effective year-end tax planning requires a proactive approach and aligns with financial goals. Consult a tax advisor to tailor strategies to your needs, maximize 2024 savings, and set the stage for long-term stability. Acting now can help you seize opportunities, reduce your tax burden, and ensure financial readiness for the future. Make these strategic moves before December 31 to achieve the best possible outcome for your 2024 tax situation.
Reference
J.P. Morgan Private Bank. (2024). Year-End Tax Planning Guide 2024. Retrieved from https://assets.jpmprivatebank.com/content/dam/jpm-pb-aem/global/en/documents/investing/Year-End-Tax-Planning-Guide-2024.pdf
Armanino LLP. (2024). Year-End Tax Planning for Individuals 2024. Retrieved from https://www.armanino.com/-/media/pdf/white-papers/year-end-tax-planning-for-individuals-2024.pdf
Internal Revenue Service. (2024). Publication 15 (Circular E), Employer's Tax Guide. Retrieved from https://www.irs.gov/pub/irs-pdf/p15.pdf