2024 has flown by! As Thanksgiving approaches, it's time to start thinking about year-end tax planning. Are you looking for ways to potentially reduce your tax liability or set yourself up for paying less taxes in the future? In this post, we'll explore the top three tax strategies you should consider before the year ends.
1. Tax loss harvesting or taking gains
As the year winds down, it’s a good time to review your investment portfolio for any underperforming assets. While no one enjoys seeing investments decline, it's important to recognize that not every investment will yield gains annually. Selling investments at a loss can be a strategic move: these losses can offset gains in other parts of your portfolio. If you don’t have realized capital gains this year, you can use up to $3,000 in capital losses to reduce your taxable income. Any losses exceeding $3,000 can be carried forward to offset future gains.
Conversely, taking gains can also be a beneficial strategy, depending on your income level. For 2024, if your taxable income is below $44,625 (for single filers) or $89,250 (for married couples filing jointly), long-term capital gains are taxed at 0%. If your income falls within these thresholds, it might be advantageous to sell some investments to realize gains while taking advantage of the 0% tax rate. This strategy not only minimizes your current tax liability but can also reduce your future tax burden when you sell these investments.
2. Gifting to Charity
As the holiday season approaches, many of us are thinking about giving back. Before you write that check to your favorite charity or religious organization, consider some alternative ways to make a more impactful contribution. Many charities accept donations in the form of stocks, bonds, mutual funds, and other securities. If you hold assets with significant unrealized capital gains, gifting these securities can be particularly advantageous. You’ll receive a tax deduction based on the full fair market value of the securities, and the charity can sell them without incurring capital gains taxes. It’s a win-win for both you and the charity.
Additionally, if you're taking Required Minimum Distributions (RMDs) from your retirement accounts, you can donate up to $100,000 of your RMD directly to a charity without having to report it as taxable income. This strategy can help reduce your Adjusted Gross Income (AGI), potentially allowing you to reclaim some tax deductions or credits. Both of these options offer effective ways to maximize your charitable impact while optimizing your tax benefits.
3. Deferring or Accelerating Income
Whether you’ve faced a challenging year at work or exceeded all your sales goals, the end of the year presents an ideal opportunity to review your income and tax situation. If your income has decreased and you’re in a lower tax bracket, consider accelerating your income for the current year. This could involve exercising stock options, realizing short-term capital gains, or converting traditional retirement assets to a Roth.
Conversely, if your income—and tax bracket—have significantly increased, it may be wise to defer as much income as possible. Strategies to achieve this include maximizing contributions to retirement plans (including any “catch-up” contributions), contributing to a Health Savings Account (HSA), and taking advantage of any deferred compensation plans your company offers. By aligning your income strategy with your current financial situation, you can effectively manage your tax liability and optimize your financial situation.
Conclusion
As we approach the end of the year, taking the time to address these top three year-end tax planning strategies can have a meaningful impact on your financial future. By taking losses or gains in your portfolio, deferring or accelerating income, and making tax-efficient charitable donations, you can optimize your tax situation and set yourself up for a more prosperous year ahead. Remember, proactive planning not only helps you save on taxes but also ensures you’re on track to meet your long-term financial goals. If you have any questions or need personalized advice, please don’t hesitate to contact us. Here’s to a successful close to the year and a financially sound start to 2025!