As the year draws to a close, time is running out to make strategic decisions that can reduce your 2024 tax burden. Here are some essential tips to help you minimize your 2024 taxes and lay the groundwork for long-term financial success.
Tax-saving Checklist before the End of 2024
1. Max Out Retirement Contributions
For dual-income households, retirement plans are one of the simplest and most effective ways to save on taxes. In 2024, the 401(k) contribution limit is $23,000 per individual (with an additional $7,500 for those over 50). At a 25% tax rate, maxing out your contributions could save $5,750 in taxes.
Note: If your employer offers after-tax 401(k) contributions (Mega Backdoor Roth), take full advantage of this opportunity.
Contribution limits for Traditional IRA and Roth IRA in 2024 are $7,000 (plus $1,000 for those over 50). Both Backdoor Roth IRA and Mega Backdoor strategies involve two steps:
1. Deposit after-tax funds.
2. Convert those funds to a Roth IRA.
Note: Some institutions set year-end deadlines for Roth conversions, so act early to avoid missing out.
2. Tax-Loss Harvesting
Pairing investments with tax strategies is crucial. A popular year-end tax-saving method is Tax-Loss Harvesting—selling underperforming investments to offset gains.
1. Sell investments (e.g. losing stocks, bonds, or funds) to offset capital gains.
2. If there are no gains, you can use up to $3,000 of losses to reduce ordinary income.
3. Excess losses can be carried forward indefinitely.
Warning: Avoid running afoul of the IRS “Wash Sale Rule”. If you repurchase the same or similar securities within before and after 30 days of selling, the loss is disallowed and added to the new purchase's cost basis.
3. Use FSA Funds
If you have a Flexible Spending Account (FSA), spend any remaining balance before year-end to avoid losing it. Eligible expenses include eyeglasses, contact lenses, and more.
4. Kiddie Tax Rules
If you've transferred investments to your child to save on taxes, beware of the Kiddie Tax. For 2024, any unearned income over $2,600 in your child’s account will be taxed at your rate if:
- The child is under 19, or
- The child is a full-time student under 24.
Plan investment sales accordingly to minimize tax liability.
5. Required Minimum Distributions (RMDs)
To save on taxes, many people contribute to IRAs during their working years. But don’t forget—Uncle Sam isn’t letting you off the hook entirely! Pre-tax retirement accounts are “tax-deferred,” not “tax-free.”
That’s why the IRS requires you to start taking Required Minimum Distributions (RMDs) from your IRA accounts once you turn 72. And yes, these withdrawals are subject to taxes.
Key Points:
- Missed RMD Penalty: If you fail to withdraw the required amount, the IRS imposes a 50% penalty on the portion you didn’t withdraw.
- Example: If your RMD is $10,000 and you only withdraw $5,000, the penalty is 50% of the $5,000 shortfall—resulting in a $2,500 fine.
How to Avoid This "Disaster":
- Plan your RMD amounts in advance.
- Unsure how to calculate your RMD? Visit our website link below for a quick and easy solution!
Retirement accounts are a prime target for the IRS. Once you turn 72, there’s no dodging their scrutiny. Make sure to withdraw your RMDs on time every year, or the IRS will be knocking on your door—right on schedule!
Below are the accounts that require RMD:
Individual Retirement Accounts (IRAs)
- Traditional
- Rollover
- Inherited
- Simplified Employee Pension (SEP)
- Savings Incentive Match Plan for Employees (SIMPLE)
Qualified Retirement Plans (QRPs)
- Schwab’s QRP/Keogh
- Individual 401(k)
- 403(b)(7)
6. Plan Equity Compensation
If you hold stock options granted by your company, especially Incentive Stock Options (ISOs), the end of the year is an ideal time to carefully evaluate whether to exercise them. Exercising options can trigger the Alternative Minimum Tax (AMT), so it’s essential to compare the impact of AMT versus regular tax to determine the optimal timing. Since stock options can involve complex tax considerations, here are some key points to keep in mind:
- RSU (Restricted Stock Units) Withholding Rates
- The default withholding rate for RSUs is 22%.
- If your supplemental income exceeds $1,000,000, the withholding rate increases to 37%.
- When deciding on your RSU vesting options, consider the withholding method carefully to optimize your tax strategy.
- NQSO (Non-Qualified Stock Options) Exercise Timing
- When exercising NQSOs, it’s crucial to account for the time value of tax, ensuring your tax payments align with your broader financial goals.
- Strategically plan the timing for exercising both ISOs and NQSOs to minimize tax impact and maximize financial efficiency.
Proper tax planning for stock options can significantly reduce your tax liability and enhance your financial outcomes. Take the time to review and plan accordingly!
7. Optimize Charitable Donations
Donations remain a highly effective way to save on taxes while giving back. Consider:
- Donating appreciated securities to avoid capital gains tax.
- Using a Donor-Advised Fund (DAF) to maximize itemized deductions in one year while spreading donations over time.
- Direct IRA donations for those 70½ or older to exclude distributions from taxable income.
8. Use the Annual Gift Tax Exclusion
Under U.S. tax law, each individual can gift up to $18,000 per recipient annually without incurring gift taxes. If the gift exceeds $18,000, the excess amount counts toward your lifetime gift exemption limit. Properly utilizing the annual gift tax exclusion is a key strategy for effective financial and estate planning. Here are some important considerations:
Key Points to Remember:
- 529 Education Savings Plans
- Contributions to a 529 account for a child are counted toward the $18,000 annual gift tax exclusion.
- Estate Planning Benefits
- If your assets are likely to exceed the federal estate tax exemption, spreading gifts across multiple recipients using the annual exclusion is a highly effective strategy.
- When creating an Irrevocable Life Insurance Trust (ILIT), the annual exclusion can help avoid estate taxes while using Crummey Notices to allocate each beneficiary’s share flexibly.
- Seek Professional Advice
- These strategies often involve complex tax and legal considerations. Consult a financial or tax advisor or an estate attorney to ensure your plan aligns with your goals and complies with the law.
Making full use of the annual gift tax exclusion can help reduce your taxable estate and support your loved ones in a tax-efficient manner!
9. Avoid Estimated Tax Penalties
Many people face penalties for underpaying estimated taxes, but this is completely avoidable. Here’s how you can stay ahead and avoid penalties:
- Pay Using Estimated Tax Vouchers
- Whether you use TurboTax or a CPA, if you owe more than $1,000 in taxes annually, your software or tax professional will typically prepare estimated tax vouchers for you.
- Use these vouchers to make payments directly on the IRS website to cover your tax liability.
- Pay Through Your W-4
- If you forgot to pay estimated taxes or prefer not to make early payments, here’s a useful trick: adjust your W-4 form at work.
- Increase your withholding through your remaining year-end paychecks to cover the estimated tax shortfall.
Now’s the time to act! For more detailed financial planning guidance, please schedule time with us!
Disclosure:
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.