Along with holiday preparations and celebration, it would be a great idea to set aside some time before year-end to review your 2024 tax situation with your financial advisor and tax professionals and implement any last-minute strategies. Here are some ideas and tips.
Maximize Retirement Contributions for the Year
If you participate in an employer-sponsored retirement plan (such as a 401(k) and 403(b)), make sure you contribute as much of the annual maximum as you can. For those under 50 years old, that figure is $23,000 and those over 50 can add an additional $7,500. If you are a SIMPLE IRA participant, the normal maximum is $16,000 and the over-50 catch-up is $3,500. Even if you don’t reach the maximum, be sure to at least maximize your employer match.
Before the end of the year, review your 401(k) deferrals and tax withholding to confirm it agrees with your current income and living expense needs. Sometimes with pay raises and bonuses, these can be adjusted to allow for greater contributions and less of a tax surprise in April.
If You’re 73 or Older, Don’t Forget Your RMD
Those who reach 73 years old in 2024 and older must take their required minimum distribution (RMD) from tax-deferred accounts such as 401(k)s and IRAs. If you turn 73 in 2024, you have until April 1, 2025, to take your 2024 RMD, but if you wait until after January 1, 2025, to take this first distribution, you’ll have two distributions (2024 + the one for 2025) in the same tax year, so plan accordingly. The penalty for not taking your RMD is severe, so don’t wait.
Those who have inherited IRAs should pay heed to RMD requirements too. If you had an inherited IRA before 2020, you still need to take your annual distribution. Inherited IRAs where the decedent passed in 2020 or later may or may not require a distribution, but are still subject to the 10-year window for eventual full distribution. You need to take the distribution prior to year-end for it to count for 2024.
Read more about inherited IRAs here.
Be Charitable This Holiday Season
Charitable contributions can go a long way in saving taxes. One strategy for those over 70½ years old is to donate to charity directly from their traditional IRA. Mallory Kretman advises, “The amount transferred doesn’t count as part of your taxable income, which could help you avoid moving into a higher tax bracket.” You can give up to $105,000 per year this way (as of 2024). If you’re married and filing jointly, your spouse can do the same from their IRA, doubling the potential amount. The charity must be a qualified organization, like most public charities, but private foundations and donor-advised funds typically don’t qualify.
“Another charitable giving strategy that has become wildly popular amongst investors,” shares Mallory, “is utilizing a charitable giving account called a donor-advised fund (DAF). You donate assets, like cash or appreciated investments, to the fund. Appreciated investments are ideal for funding a donor-advised fund because you can avoid capital gains taxes while deducting the full fair market value of the donation, maximizing tax efficiency. In the year you donate to the DAF, you take an immediate tax deduction, and decide later which charities to support.”
For many of Mallory’s clients, she says, “They maximize said immediate tax deduction by combining multiple years of charitable donations into a single tax year, which is also known as ‘bunching’ contributions. The funds in a DAF can grow tax-free while you plan your giving. It’s a flexible, convenient, and tax-efficient way to support causes over time while potentially simplifying your charitable strategy.”
Use Late-Season “Harvesting”
December is a big month for tax-loss harvesting. By selling investments in taxable accounts that have appreciated along with those investments carrying a loss, you can use the losses to offset the gains and avoid taxation on those gains. Mallory explains, “If you carry a net realized loss for the year, you can use up to $3,000 of said loss to offset ordinary income. Future realized gains can also soak up any carryforward losses.” As you think about tax-loss harvesting, be careful about the “wash-sale” rule, however, you can only re-buy the investments you’ve sold at a loss after 30 days for the tax loss to count.
Make Sure Your Medical Expenses Are Working for You
If you participate in a high-deductible health plan, don’t forget to maximize your health savings account (HSA) contribution. For 2024, individuals can contribute up to $4,150, and a family can contribute up to $8,300. If you are 55 and older, you can contribute an additional $1,000. HSA contributions are tax-deductible against income, any growth in the accounts are tax-deferred, and the withdrawals for qualified medical expenses are tax-free. It’s rare to find a “triple-play” tax strategy today, so take full advantage of this one.
If your medical expenses this year are likely to be over or near the 7.5% of AGI threshold for tax deductions, take a look at IRS Publication 502. There could be deduction-eligible expenses you aren’t aware of, such as eyeglasses, hearing aids, personal protective equipment (masks, sanitizer, wipes), and home improvements to accommodate a disabled or custodial care patient (ramp, safety equipment or safeguards, etc.). “For many, the 7.5% of AGI floor is hard to surpass, so if you find you are indeed above that threshold, consider accelerating some deduction-eligible expenses into the current tax year,” Mallory suggests.
Manage Your Taxable Income
Remember that your 2024 income can affect other tax matters than just income tax. Those on Medicare ought to examine whether further taxable income bumps up future Medicare premiums. Those individual taxpayers with an AGI over $103,000 in 2024 (joint filers over $206,000) will have higher Medicare premiums for 2026. If you’re near these thresholds, look for ways to lower taxable income to save later.
Get Help With Year-End Tax Planning
These are just a sample of the ways Laurel Wealth Planning can help you with year-end tax planning and other personal finance matters. LWP advisors can put together effective programs based on what you want and need. To set up a free consultation, call Laurel Wealth Planning at (952) 854-6250 or contact them online.
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