As the end of 2024 approaches, the holiday festivities aren’t the only thing on the horizon. It’s also a pivotal time to take stock of your financial situation and implement strategies to reduce your tax liability before the year ends. Proactive tax planning can help you optimize deductions, manage your tax bill, and set the stage for a stronger financial year in 2025.

Here’s a closer look at key steps to take to maximize your financial opportunities before the year comes to a close.

#1 Understand Key Deadlines and Limits

Several tax-related actions must be completed by December 31 to have an impact on your 2024 tax return. Familiarizing yourself with these deadlines can help you avoid penalties and ensure you’re taking full advantage of available opportunities.

Required Minimum Distributions (RMDs)

If you’re 73 or older, you must take RMDs from tax-deferred accounts like traditional IRAs or 401(k)s by December 31. Missing this deadline or withdrawing less than required can result in steep penalties of up to 25% of the shortfall.

Charitable Contributions

Donating to qualified charities by December 31 can provide valuable tax deductions. Contributions can include cash, appreciated assets, or other gifts. If you’re over 70½, you can make Qualified Charitable Distributions (QCDs) directly from your IRA, which can satisfy your RMD requirements while potentially reducing your taxable income.

Retirement Account Contributions

The contribution limit for 401(k) plans in 2024 is $23,000, with an additional $7,500 catch-up contribution for individuals aged 50 or older. For traditional IRAs, the limit is $7,000, with a $1,000 catch-up contribution for those 50 or older. While contributions for 2024 can be made until April 2025, making them before December 31 allows you to lower your taxable income for the current year.

#2 Evaluate Tax Saving Strategies

Year-end tax planning offers opportunities to reduce your tax bill. Here are the key moves to consider:

Maximize Tax-Advantaged Accounts

Maximizing contributions to tax-deferred accounts, such as traditional IRAs and 401(k)s, can provide a major boost to your nest egg. In addition to lowering your taxable income for 2024, contributing the full amount enables you to take advantage of tax-deferred growth sooner, which can substantially enhance your retirement savings over time.

Take Advantage of Itemized Deductions

If you itemize, year-end is a great time to maximize eligible deductions like charitable contributions or mortgage interest. Medical expenses exceeding 7.5% of your adjusted gross income (AGI) can also qualify. Timing expenses strategically, such as prepaying property taxes, can help you surpass the standard deduction and reduce taxable income.

Consider Roth IRA Conversions

A Roth IRA conversion can be a smart move if you expect higher tax rates in retirement. Converting a traditional IRA into a Roth IRA allows investments to grow tax-free and eliminates required minimum distributions. While taxes are owed on the converted amount, completing the conversion before December 31 lets you secure current rates.

Harvest Tax Losses

Tax loss harvesting involves selling underperforming investments to offset capital gains elsewhere in your portfolio. The IRS allows you to use up to $3,000 in losses to offset other income, with any additional losses carried forward to future tax years. This strategy can help reduce your tax liability while aligning your portfolio with your long-term goals.

Defer or Accelerate Income

Consider your expected income and tax rate for 2025. If you anticipate being in a higher bracket, you may want to accelerate income into 2024 to take advantage of your current lower rate. Conversely, if you expect to drop into a lower bracket next year, deferring income to 2025 could help reduce your 2024 tax liability.

#3 Plan Ahead for 2025

Taking a forward-looking approach to your financial strategy can help you prepare for changes in tax laws, interest rates, and other economic factors that could impact your financial plan in 2025. Here are some upcoming changes to keep in mind.

  • SECURE 2.0 Changes: Increased 401(k) contribution limits and other provisions under SECURE 2.0 will take effect in 2025, providing new opportunities for retirement planning.
  • Unified Credit Adjustment: The lifetime gift and estate tax exemption, currently $13.61 million, is set to drop significantly in 2026. Consider making large gifts now to lock in the current exemption before it decreases.

#4 Work With a Tax Professional

Tax laws are complex, and even small mistakes can mean missing out on major savings. A tax advisor can help you identify overlooked opportunities, ensure compliance, and provide peace of mind. Whether you need guidance on reducing your tax bill, understanding RMDs, or planning for Unified Credit changes, a tax professional is an invaluable resource.

Are you ready to optimize your tax strategy and make the most of these year-end opportunities? Schedule a free consultation to get started. Our team is here to help you confidently close out 2024.