As the year draws to a close, reviewing your financial affairs and engaging in strategic tax planning becomes increasingly important. Here are 13 tax planning items that merit your attention before the year ends.
1. Maximize Retirement Contributions: If eligible, ensure you contribute the maximum allowable amount to your retirement accounts. For those aged 50 and older, catch-up contributions allow you to invest even more towards your 401(k) or IRA, providing a dual benefit of increasing your retirement savings while reducing your current taxable income. For 2023, the IRS allows additional catch-up contributions of $7,500 for 401(k)s and $1,000 for IRAs.
2. Consider Roth Conversions: Converting traditional IRA funds to a Roth IRA can be a strategic move, especially during a low-income year. Although taxes are due on the converted amount, a Roth IRA offers tax-free withdrawals in retirement, providing long-term tax advantages. Conversions must be completed in the current year to count towards this year's tax planning.
3. Explore Backdoor Roth IRAs: If your income exceeds Roth IRA contribution limits, consider a backdoor Roth conversion. This involves contributing to a traditional IRA and then converting those funds to a Roth IRA, offering a workaround to access the benefits of a Roth account. To do this, you need to make sure you have no IRA funds currently. You do have until tax day 2025 to complete this process.
4. Charitable Contributions: Donating to charity not only supports worthwhile causes but also provides potential tax deductions. Consider donating appreciated securities to avoid capital gains taxes while still deducting the total market value of the gift.
5. Tax Loss Harvesting: Assess your investment portfolio for underperforming assets. Selling these assets before year-end can offset capital gains and reduce your taxable income. This strategy is essential in optimizing your portfolio's tax efficiency.
6. Tax Gain Harvesting: On the flip side, consider realizing some gains intentionally if you're in a low tax bracket. You can capitalize on the current low capital gains tax rate by selling appreciated assets.
7. Gifting: Take advantage of the annual gift exclusion to reduce your taxable estate. This year, you can gift up to $18,000 per recipient without triggering gift taxes, effectively transferring wealth.
8. Review Tax Withholdings: Ensure your withholdings align with your anticipated tax liability. Adjustments may prevent a large tax bill at year-end or avoid tying up excess funds with the IRS. Understanding your current year's tax liability can help you better plan for some of these tax planning ideas. Remember, estimated taxes for Q4 are due January 15, 2025.
9. Utilize Dependent Care FSA Funds: Max out your Dependent Care Flexible Spending Account to lower taxable income and cover eligible expenses, like childcare. Make sure to use the funds before expiration, as most plans require them to be used by year-end.
10. Maximize Your Health Savings Account (HSA): HSAs offer a triple tax advantage—contributions are tax-deductible, grow tax-free, and withdrawals for qualified expenses are not taxed. Max out your contributions to bolster both your health savings and reduce your taxable income. The HSA contribution limits for 2024 are $4,150 for self-only coverage and $8,300 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
11. Utilize All FSA Funds: Review your Flexible Spending Account balance and spend it on eligible expenses to avoid forfeiting unused funds, as any remaining amount may not carry over into the next year.
12. Review RSU, NSO, and ESPP Strategies: If you have received Restricted Stock Units (RSUs), Non-Qualified Stock Options (NSOs), or have participated in an Employee Stock Purchase Plan (ESPP), year-end is a prudent time to evaluate the tax implications and strategize your total stock exposure.
13. Plan for Required Minimum Distributions: If you are aged 73 or older, reviewing your RMDs is essential, as it ensures compliance with IRS rules and prevents possible penalties. Meeting these requirements may impact your taxable income, and early planning can avert unnecessary financial strain. Individuals aged 70½ and older may also consider making Qualified Charitable Distributions (QCDs) directly from their IRAs. QCDs allow for tax-free transfers, satisfying RMDs without increasing your adjusted gross income.
All these strategies are designed to optimize your tax situation before the year's end.
Taking proactive steps in your tax planning will empower you to maximize your financial well-being both now and in the future.
If you have questions or would like to discuss these ideas further, feel free to schedule a call:
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP’s express prior written consent.
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