There are a number of tax saving measures that can be taken throughout the year, and the end of the year is an optimal time to look over your current financial situation and determine whether any of these strategies should be implemented for you.
Maximize retirement plan contributions
If your employer offers a match, ensure you are contributing at least enough to receive the full amount offered. If you can contribute more, consider contributing up to the maximum allowed. For 401(k)s, in 2024, that amount is $23,000, or $30,500 if you are 50 or older. This contribution reduces the amount of taxable income recognized for the current year and increases your retirement savings. This is a good tax-planning strategy if you think your tax rate will be lower in retirement than it is today. If you believe your tax rate will be higher during retirement, saving in a ROTH account may be more advantageous. If your employer offers a ROTH 401(k) and you haven’t already maxed out your traditional 401(k), you can make after-tax contributions to a ROTH 401(k) account up to the limits listed above.
Direct Your Bonus
Are you expecting a bonus this year? Often you can choose, in advance of payment, how much of your bonus is put into your employer sponsored plan. Use your bonus to max out your retirement savings for the year. This is a good time to also review your tax withholding amounts and increase your withholding if necessary so you don’t end up owing money to the IRS in April.
Consider a ROTH Conversion
If your income exceeds the ROTH IRA contribution limits ($161,000 for individuals $240,000 for married couples), you can convert pre-tax savings in a traditional IRA account into a ROTH IRA. When you make this conversion, you will pay income tax on the funds you are converting. The end of the year is an optimal time to review the amounts because you want to ensure you are converting enough to take you up to the top of your current tax bracket, without pushing you into a higher bracket. There are on-line ROTH conversion calculators that can help you determine how much to roll over.
Make Charitable Contributions
The end of the year is a good time to assess your taxable income and determine how much you can deduct in charitable contributions. It’s a good idea to match the charitable deductions against your income, giving larger amounts in years where you expect to recognize more income. If using cash to donate to qualified charities, you can deduct up to 60% of your adjusted gross income. It may be more efficient to donate highly appreciated securities, in which case you can deduct up to 30% of your AGI.
In years where you want to take a large deduction but don’t want to give the entire amount to charity in one year, consider contributing to a donor advised fund (DAF). There are no limitations on the amount you can contribute to a DAF. Grants to charities do not have to be made in the same year as the donation but the grants, when they are made, must be made to a qualified 501(c)(3) charity and cannot be made to individuals. With a DAF, you take the tax deduction in the year you contribute to the DAF and you can make grants to qualified charities at any time thereafter. Some sponsors may require a minimum contribution and/or a minimum annual grant. The same deduction percentages apply to cash and stock gifts as listed above. Be sure you have a successor listed on your plan to direct the DAF after your death, or the sponsor will determine how to distribute the funds in your account.
If you are over 70 1/2 you can make a charitable contribution of up to $105,000 of your required minimum distribution. (RMD age is currently 73.) If you donate to a qualified charity directly from your IRA account, you receive the tax deduction, but you aren’t taxed on the distribution as you would be if you took the distribution and then made a contribution to a charity. This will satisfy your RMD but it does not increase your taxable income.
Exercise Non-Qualified Stock Options
Non-qualified stock options are taxed as ordinary income when they are exercised. If you have non-qualified stock options through your employer, waiting until the end of the year to decide to exercise allows you to determine how much to exercise while staying within your current tax bracket. This will allow you to manage the tax burden more efficiently than if you exercise your options all at once.
Reduce Capital Gains with Tax Loss Harvesting
Look at your realized capital gains for the year and see if there are losses within the portfolio that you want to recognize by selling the losing positions now. If the losses in the portfolio are greater than the gains you have recognized to date, you can potentially offset up to $3,000 of ordinary income on your return this year. If you recognize more than $3,000 in losses, you can carry over the loss into future tax years. Beware of the “wash sale rule” that prevents you from buying back the same or similar security within 30 days before or after the realization of the loss.
Optimize your Health Savings Account (HSA)
If you have a high-deductible health insurance plan, you can contribute to an HSA (up to $4,150 for individuals, $5,150 if 55 or older, $8,300 for families). These are tax-free contributions which receive tax free growth. You don’t pay taxes on withdrawals as long as you use them to pay for qualified medical expenses. Unlike flexible savings accounts (FSAs), there is no annual requirement to use the funds. Therefore, you can use this as another form of retirement like savings. Simply save all of your medical expenses (scan them rather than keeping paper copies that may fade) and use them in retirement to offset withdrawals you take from this account.
Annual Exclusion Gifts
If you have more than enough assets to last through your retirement, consider making tax-free gifts to your family members. An individual can gift up to $18,000 to another individual without filing a gift tax return or using up any of your estate exclusion. If you are married, you jointly can gift up to $36,000 to one individual. This doesn’t reduce your taxable income but helps transfer wealth to the next generation in a tax efficient way.
For any of these strategies, be sure to consult with both your tax preparer and your wealth advisor to determine which strategies work best for your situation and your goals. Connect with our team of advisors today to discuss.
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