End-of-year tax strategies for individuals

With the end of the year approaching, now is an ideal time to evaluate your tax situation and take advantage of potential tax-saving strategies. Proactive year-end planning can help reduce your tax bill, increase the chance of a refund, and set a solid foundation for the coming year.

This article explores a variety of strategies to help reduce your tax liability and make the most of available tax-saving opportunities before December 31.

Review your current tax situation

Start year-end planning with a quick “tax check-up” by reviewing your income, deductions, and any major life events. 

For example, if you experienced a change in marital status, the birth of a child, or a job change, these can directly affect your tax return. Significant shifts in income, taking on self-employment, starting a business, buying or selling real estate, or even large one-time bonuses all factor into your tax strategy. If you began receiving Social Security or started Required Minimum Distributions (RMDs) from retirement accounts, these income changes may also create new tax obligations. Assessing your situation now will allow you to make the most of tax-saving opportunities.

Understand the benefits of the standard deduction vs. itemizing

Deciding whether to take the standard deduction or to itemize depends on your situation. For many, the standard deduction simplifies filing and often results in greater savings. In 2024, the standard deduction is $29,200 for joint filers, $21,900 for heads of household, and $14,600 for single filers or those married filing separately.

However, some deductible expenses, like medical costs above 7.5% of your adjusted gross income, state and local taxes (up to $10,000), charitable donations, and mortgage interest, can only be claimed if you itemize. If your itemized deductions add up to more than the standard deduction, itemizing could be beneficial. 

If itemizing makes sense for you, consider bunching discretionary expenses into one year. By grouping charitable contributions, large medical bills, and other deductible expenses, you may reach the threshold needed to itemize, which can help you realize more tax savings this year.

Retirement planning and distribution opportunities

For 2024, you can contribute up to $23,000 to a 401(k) plan if you’re under 50, with an additional $7,500 catch-up contribution if you’re 50 or older. These contributions will reduce your current annual income. Similarly, traditional IRAs allow contributions up to $7,000 (plus a $1,000 catch-up for those 50 and older). 

Consider whether a Roth IRA conversion might be a smart move this year. Converting traditional IRA funds to a Roth means you pay taxes now but enjoy tax-free growth and withdrawals later. This is often beneficial if you expect your tax bracket to increase in the future. It’s wise to review the tax implications of any conversion with a tax professional before committing to this strategy, as it will increase your taxable income for the current year.

For those age 73 or older, don’t overlook your RMDs. Failing to take the RMD from retirement accounts by December 31 can lead to a steep penalty of 50% on any missed amount. However, if this is your first RMD year, you have the option to defer it until April 1, 2025, though this means you’ll need to take two distributions in 2025.

Manage investment gains and losses

Reviewing your investment portfolio before year-end can help you manage taxes on gains and losses effectively. Realizing capital losses on underperforming investments, for instance, can offset capital gains and reduce your overall tax liability.

Capital losses can be used to offset gains dollar-for-dollar, and you can deduct up to $3,000 of net capital losses against ordinary income ($1,500 if married filing separately). Any losses beyond this limit can be carried forward to future tax years, providing ongoing tax savings.

Be mindful of the wash sale rule if you’re selling assets to realize a loss. This rule disallows the deduction if you repurchase the same or a substantially identical asset within 30 days before or after the sale. Waiting at least 31 days or selecting a different investment in the same sector can help you stay in compliance.

If you need to realize gains to rebalance your portfolio or fund expenses, try to sell assets held for over one year. These long-term gains are taxed at lower rates (15% or 20% for most taxpayers), making this strategy more tax-efficient than realizing short-term gains, which are taxed at ordinary income rates. 

Consider timing your income and deductions

The timing of when you recognize income or deductions can impact your tax liability. If you expect to be in a lower tax bracket next year, deferring income – such as a year-end bonus or retirement withdrawal – could reduce this year’s taxable income. On the other hand, if you expect higher rates or a rise in income next year, accelerating income into the current year may allow you to benefit from today’s lower tax rate.

You may also want to accelerate deductible expenses into the current year if it provides an immediate tax advantage. For example, paying property taxes early, making additional charitable donations, or covering next year’s mortgage interest can all help reduce this year’s taxable income. However, keep in mind that these expenses only benefit you if you itemize, and deductions such as state and local taxes (SALT) are subject to a $10,000 cap. It’s best to evaluate which deductions offer the most value based on your situation. 

Make the most of charitable giving

Charitable contributions not only benefit the causes you care about but can also help reduce your tax burden. Cash donations made to qualified charities by December 31 are deductible for those who itemize, and donations of appreciated assets like stocks can offer additional benefits by allowing you to avoid capital gains taxes on the asset’s appreciation.

If you plan to give larger amounts or wish to spread donations over multiple years, consider a donor-advised fund (DAF). With a DAF, you can make a large charitable contribution this year to exceed the standard deduction threshold and then distribute those funds to charities over time. Contributions to the DAF are tax-deductible immediately, providing flexibility for future giving.

For those aged 70 ½ or older, qualified charitable distributions (QCDs) from an IRA allow you to transfer up to $105,000 directly to a qualified charity, counting toward your RMD but not as taxable income. This can be an excellent way to give if you don’t itemize or wish to limit taxable income from RMDs.

Explore estate and gift tax strategies

Year-end is an ideal time to review strategies for transferring wealth to loved ones or reducing future estate taxes. For 2024, you can gift up to $18,000 per recipient tax-free, and married couples can double this amount to $36,000 per recipient. Making gifts within this annual exclusion limit is a straightforward way to reduce your taxable estate without incurring gift taxes.

Additionally, payments made directly to medical or educational providers on behalf of someone else are exempt from gift tax. This allows you to support family members or others with qualified expenses without impacting your gift limits.

Finally, a year-end review of your estate plan, including your will, trusts, and beneficiary designations, can help ensure that your wishes are clear and your strategies align with any recent changes in estate or gift tax laws. This is also an opportunity to consider setting up trusts or other vehicles if you have specific goals for managing or protecting your assets.

Take advantage of education-related tax benefits

Tax credits are available for those who are paying for higher education expenses. The American Opportunity Tax Credit (AOTC) allows up to $2,500 per eligible student for qualifying education expenses, while the Lifetime Learning Credit provides up to $2,000 per return. It’s essential to verify eligibility and meet income limits to fully benefit from these credits.

Additionally, if you have a 529 plan for a dependent, you can make contributions by year-end to maximize any state income tax benefits, depending on your state’s rules. This can provide both long-term savings and immediate tax benefits if you’re using funds to cover future educational expenses.

Maximize health savings accounts (HSAs) and flexible spending accounts (FSAs)

Contributions to an HSA can offer triple tax advantages – contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. For 2024, the contribution limit is $4,150 for individuals with high-deductible health plans and $8,300 for families, with an additional $1,000 allowed for those 55 or older. HSAs can roll over year to year, providing a tax-efficient way to save for medical expenses.

FSAs, however, often come with a “use it or lose it” rule, meaning unused funds may expire at year-end. Some employers offer a short grace period or a carryover option, so check your plan to avoid forfeiting funds. If you have remaining FSA funds, consider scheduling medical appointments or purchasing eligible items before December 31.

Use energy tax credits to make home upgrades

If you’re considering home improvements, certain energy-efficient upgrades may qualify for tax credits. The Inflation Reduction Act provides credits for energy-efficient home systems and electric vehicles. For instance, purchasing and installing qualifying items like heat pumps, insulation, or solar panels before year-end can reduce your tax liability and lower future utility costs. Please note that the amount of the credit differs depending on the type of improvement made. 

The clean vehicle tax credit is another significant opportunity, with credits available for both new and used electric vehicles that meet eligibility requirements. If you’re planning to make these purchases, confirm that the equipment and your income qualify to avoid surprises at tax time.

Review your tax withholding and payments

It’s essential to verify that you’ve withheld the correct amount of taxes to avoid unexpected tax bills or penalties. If you have substantial income not subject to withholding, such as from self-employment or investments, making estimated tax payments ensures you stay on track with IRS requirements.

Take a moment to review your W-4 form and adjust it if needed, especially if your financial or family circumstances have changed this year. Estimated tax payments are typically due quarterly, with the final payment for the current tax year due on January 15 of the following year. Ensuring that your tax payments are accurate now can save you from surprises when it’s time to file.

Prepare for potential tax law changes

Tax laws are always evolving, and certain provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire after 2025, potentially affecting individual tax rates, deductions, and credits. Keeping an eye on current and proposed tax legislation can help you make decisions that will benefit you in the long run. Staying informed about these changes and discussing them with a tax professional allows you to plan effectively for any upcoming shifts that might impact your future tax strategy.

Stay organized and consult a tax professional

Year-end tax planning can provide substantial benefits, but it often requires staying organized and keeping good records. Collect documentation of your income, expenses, receipts, and any other paperwork needed to support deductions and credits you’re claiming. Good recordkeeping also helps ensure a smoother filing process and offers support if you’re ever audited.

Consulting an expert on more complex strategies, such as Roth conversions or charitable giving through donor-advised funds, can provide peace of mind and enhance your financial planning.

To ensure you make the most of the tax-saving strategies available before the end of the tax year, please contact one of our expert advisors. We’ll offer insights tailored to your situation, helping you uncover tax-saving opportunities and avoid potential pitfalls.