Considerations for End of Year Tax Planning
As the year winds down, it is always a good idea to review your tax situation to determine if there are ways to reduce your tax liability or take advantage of financial planning opportunities that may exist. Here are several items that may warrant consideration prior to the end of the year:
§ Make charitable contributions using gifts of appreciated stock instead of cash. Most charitable organizations, including universities, churches and other non-profit organizations, will accept gifts of stocks or mutual funds. In addition to benefiting a worthy charity, gifting appreciated investments helps you avoid paying taxes on your investment gain while receiving an income tax deduction (if you itemize) for your gift. Also, consider using a Donor Advised Fund which allows you to donate money or appreciated securities now to the Fund and receive the deduction (if you itemize) in the current year while distributing the funds to charity at a time of your choosing.
§ Consider a Roth Conversion. For people who have significant deductions relative to their income, or for those who find themselves in a lower-than-normal taxable income year, this strategy can help you convert a portion of your IRA into a Roth (which has more favorable distribution characteristics) without paying penalties on the money. In addition, for people who want to “fill up” their tax bracket, this may be a beneficial strategy. If you anticipate higher taxes in the future (via higher tax rates and/or higher income), a Roth conversion strategy may be very beneficial for you.
§ Realize Investment Gains to Take Advantage of the 0% Capital Gains Rate. Taxpayers with taxable income under $47,025 (Single) or $94,050 (Married Filing Jointly) pay 0% on long-term capital gains. So, those in the lower tax brackets need to scrutinize their personal portfolios (not retirement accounts) to see if it is appropriate to realize capital gains with no federal tax impact.
§ Harvest tax losses in your investment portfolio. If you have unrealized losses in your personal investment portfolio (not retirement accounts), this may be the time to sell those positions and reinvest the proceeds in another investment. You can use the loss to offset capital gains that have been realized and decrease your overall tax liability.
§ Maximize contributions to your employer sponsored 401(k) or other retirement plans. Making contributions into most retirement plans can help reduce your taxable income and ultimately your overall tax liability. Maximum contribution levels vary depending on your specific plan type, but for 401(k) plans, the maximum deferral in 2024 is $23,000 ($30,500 if you are over age 50).
§ Review your withholding and estimated payments to make sure you are not subject to the underpayment penalty. You may avoid the penalty in 2024 if your filed tax return shows you owe less than $1,000 or your total payments must equal the lesser of (1) 90% of your current year tax liability or (2) 100% of the 2023 tax liability (110% if your AGI exceeds $150,000).
For our clients, we will be considering all these options (plus a few more!) as we analyze their year-end tax situation in context of their overall financial plan. If you have any questions regarding your specific tax situation or would like to learn more about the tax saving ideas listed above, please contact our office today.