End-of-year tax planning
Steps to Take Now for Maximum Savings
by Tricia Bush, CPA, CFP®, Partner, Bestgate Advisors
As we approach year-end, it’s a good time to take stock of your finances and look for tax-saving opportunities. Whether you’re an individual, a business owner, or a 1099 independent contractor, there are key moves you can make now to help reduce your tax liability. Below are actionable steps you can take before December 31, along with items that allow more time for decision-making into next year.
For Individuals: Tax Moves Before Year-End
1. Maximize Retirement Contributions:
If you’re contributing to a 401(k), increase your contributions to the limit if you haven’t reached it yet. The 2024 contribution limit for those under 50 is $23,000, and those 50 or older can contribute an extra $7,500.
2. Charitable Giving:
Donations to qualifying charities can help reduce taxable income. Consider making your charitable donations before year-end to secure a deduction. Keep a record of all donations, and remember that donations of cash or goods are deductible if itemizing deductions.
3. Take Advantage of Tax-Loss Harvesting:
If you have investments that have lost value, consider selling them to offset any capital gains you’ve realized during the year. Known as tax-loss harvesting, this strategy can help reduce your tax bill, and you can even offset up to $3,000 of ordinary income if your losses exceed your gains.
4. Use Up FSA Dollars:
If you have a flexible spending account (FSA) for medical expenses, check your balance and use up any remaining funds before the end of the year. Some employers allow a small rollover or grace period, but otherwise, these funds are use-it-or-lose-it.
5. Review Withholding and Make Estimated Tax Payments:
If you’ve received a bonus or changed jobs this year, your tax withholding might be off, leading to a surprise tax bill. Use the IRS’s tax withholding estimator tool to check your status, and adjust withholding if necessary before December 31.
Decisions You Can Make Up to Tax Day (April 15)
1. Contribute to an IRA:
You have until April 15, 2025, to make 2024 contributions to a traditional or Roth IRA. The maximum contribution is $7,000 (or $8,000 for those age 50 and older).
2. Health Savings Account (HSA) Contributions:
If you have a high-deductible health plan, consider contributing to an HSA, which allows tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses. For 2024, the HSA contribution limits are $4,150 for individual coverage and $8,300 for family coverage. Those 55 and over can contribute an additional $1,000. You can make HSA contributions for 2024 until April 15, 2025.
For Business Owners and 1099 Independent Contractors
If you own a business or are self-employed, year-end tax planning can be especially valuable. There are several ways to lower your taxable income and prepare for a smoother tax season.
1. Accelerate Expenses and Defer Income:
If cash flow allows, consider purchasing necessary business equipment or supplies by December 31 to reduce taxable income. You might also defer invoicing clients until January to keep income lower for the current year.
2. Fund a Retirement Plan:
Contributing to a retirement plan not only helps secure your future but can significantly lower taxable income. The Simplified Employee Pension (SEP) IRA allows contributions of up to 25 percent of your net earnings from self-employment, up to a cap of $69,000 for 2024. You have until your tax filing deadline, including extensions, to make SEP contributions for the 2024 tax year.
3. 1099 Contractors: Organize and Report Income Accurately:
Collect all 1099 forms you receive for 2024 to ensure you report your income accurately. Misreporting income could trigger a penalty or audit, so it’s worth taking extra care here.
Additional Year-End Obligations for Business Owners
• Beneficial Ownership Information (BOI) Reporting:
If your business meets the requirements for BOI reporting under the Corporate Transparency Act, make sure to submit the necessary information to the Financial Crimes Enforcement Network (FinCEN). This is a new requirement for 2024 and comes with a hefty penalty of $591 per day up to $10,000.
• MarylandSaves Exemption (for Maryland-Based Businesses):
Maryland businesses can potentially be exempt from the MarylandSaves program if they already offer a qualifying retirement plan to employees. The program aims to support retirement savings, but businesses that comply with alternative plans can opt out. Review your status to confirm if you need to enroll or file for exemption. It could save you $300 a year!
Preparing for Tax Season
The earlier you start on tax planning, the more likely you are to maximize savings and reduce stress. By tackling these steps before December 31, and keeping a few tasks open until April 15, you’ll set yourself up for a smoother tax season and potentially a lower tax bill.
This checklist can act as a guide as we wrap up the year, so take a little time now to review your finances, explore ways to save, and consult a tax professional if you have specific questions. Every action you take now brings you closer to a stronger financial position next year.
Disclosure: This article provides general information and should not be relied upon as specific tax or legal advice. Tax situations vary, and tax laws are subject to change. It’s best to consult a qualified tax professional to discuss your individual circumstances and make the most of any tax-saving strategies.
