Filing income taxes can feel overwhelming, but proactive year-end tax planning can ease the process and lead to better financial outcomes. As the year winds down, it’s the perfect time to focus on year-end tax planning strategies to prepare for tax season effectively.
Year-End Tax Planning Strategies
Delaying year-end tax planning could result in missed opportunities and deadlines, so starting early is essential. Below are some valuable tips to help you optimize your tax situation:
1. Maximize Retirement Contributions
U.S. tax laws offer various incentives for saving toward retirement, allowing you to reduce your taxable income. Contributing to retirement accounts such as 401(k)s or traditional IRAs helps you defer taxes on contributions until you withdraw the funds in retirement. This lowers your taxable income for the year and is a widely-used strategy for year-end tax planning, particularly if you’re self-employed.
For self-employed individuals, including digital nomads and RVers, maximizing retirement contributions is a great option.
On the other hand, Roth IRAs allow tax-free growth but won’t reduce your taxable income in the current year. They have the benefit of growing tax-free. When you go to use the funds later, they are tax-free! Yes. That’s right. Roth IRAs grow tax-free.
2. Consider Itemizing Deductions
While the standard deduction is convenient and at this point quite high, itemizing may offer greater benefits, especially if you’ve had significant expenses throughout the year. Deductions can include:
- Medical expenses (including mileage, copays, and prescriptions)
- Charitable donations
- State income or sales tax
- Real estate and property taxes
If you’ve had high medical bills, made substantial charitable contributions, or are a homeowner, itemizing may provide a larger deduction than the standard deduction. For 2024, the standard deduction amounts are:
- $14,600 for single filers
- $21,900 for heads of household
- $29,200 for married filing jointly
It’s important to keep detailed records of any expenses that qualify for itemized deductions. Remember, state deductions may differ from federal ones, so assess both carefully.
While the standard deduction is high for 2024, I do see taxpayers with either high medical expenses and/or high charitable giving able to itemize and top the standard amounts. It could be a combination of using both.
If you own a home base, then throwing in mortgage interest and real estate taxes might put you over the edge. Don’t discount this option and the end-of-year tax planning to up your charitable contributions if you’re on the line.
3. Claim Available Tax Credits
There are numerous tax credits available, from credits for dependents to those for higher education expenses or environmentally-friendly home improvements. These credits can significantly reduce your tax bill.
Be sure to track potential credits throughout the year and gather any required documentation before filing. For example, the solar tax credit is available for RV owners who have installed solar panels on their vehicles, as long as the RV is considered their primary residence.
4. Take Required Minimum Distributions (RMDs)
If you’re 72 or older, you must take RMDs from certain retirement accounts, such as 401(k)s or traditional IRAs. The IRS determines the amount based on your age and the account balance. Failure to take the required distribution could result in a 50% penalty on the amount you should have withdrawn.
Remember, RMDs are taxable, but you can avoid penalties by making charitable donations from your retirement account. These donations count toward your RMDs and reduce your taxable income.
While you are required to take the RMD, there’s nothing that says you need to distribute the cash to yourself. You can leave the funds invested if you don’t need the funds to live. This is a great way to keep money invested for the future while still meeting your IRS obligations.
5. Offset Gains with Investment Losses
Another key strategy is “loss harvesting,” which involves selling underperforming investments to realize losses and offset capital gains. These losses can offset gains dollar for dollar, reducing your overall tax burden.
If your losses exceed gains, you can deduct up to $3,000 in excess losses to reduce other taxable income, with any additional losses carried over to future years.
Conclusion
By starting your tax planning now, you can take advantage of tax-saving strategies that will benefit you when tax day arrives. With careful research, planning, and preparation, you’ll be in a strong position to manage your taxes effectively for this year and take advantage of tax planning strategies.
