As the year wraps up, it’s a good time to look at ways to lower your tax bill. These ideas are easy to follow and can make a real difference when it’s time to file. Here are five straightforward year-end tax strategies you can use before December 31 to keep more of your hard-earned money.
1. Maximize Retirement Contributions
Contributing to tax-advantaged retirement accounts is a powerful way to reduce your taxable income. Here’s how:
- 401(k): For 2024, you can contribute up to $23,000, with an additional $7,500 catch-up contribution if you’re 50 or older, totaling $30,500. IRS
- Traditional IRA: The contribution limit for 2024 is $7,000, or $8,000 if you’re 50 or older. IRS
This strategy not only lowers your taxable income but also helps secure your financial future.
2. Harvest Tax Losses
If you’ve experienced losses in your investment portfolio, you can use those losses to offset taxable gains:
- Sell underperforming investments to realize losses.
- Use losses to offset gains dollar-for-dollar, and deduct up to $3,000 of excess losses against ordinary income.
Important: Be mindful of the wash-sale rule, which prevents repurchasing the same or a substantially identical investment within 30 days.
3. Make Charitable Contributions (if you itemize deductions)
Year-end giving is a win-win. You can support causes you care about while reducing your tax burden. Consider:
- Cash Donations: These are tax-deductible when made to qualified charities.
- Non-Cash Donations: Items like clothing or household goods are deductible at their fair market value.
- Donor-Advised Funds: Contribute to a donor-advised fund to claim the deduction now and decide later which charities to support.
Ensure you keep detailed records and receipts for all contributions.
4. Perform a Tax Projection
A tax projection is a proactive way to evaluate your potential tax liability and make adjustments before the year ends:
- Check if you’ve underpaid or overpaid taxes for the year.
- Determine if you qualify for additional credits or deductions.
- Plan estimated tax payments or withholding adjustments to avoid penalties.
Working with a CPA can make this process smoother and more accurate.
5. Contribute to a Health Savings Account (HSA)
If you’re enrolled in a high-deductible health plan (HDHP), an HSA is a powerful tool to save on taxes and healthcare costs. HSAs offer a triple tax advantage:
- Tax-Deductible Contributions: For 2024, you can contribute up to $4,150 for individuals and $8,300 for families.
- Tax-Free Growth: Funds in the account grow tax-free.
- Tax-Free Withdrawals: Use funds tax-free for qualified medical expenses.
HSAs are flexible—you can use the funds immediately or let them grow for future medical expenses. Unlike FSAs, HSA balances roll over from year to year, making them an excellent long-term savings vehicle.
Example: How This Adds Up
Let’s look at a quick example. Say Alex makes $200,000 a year and is taxed at an average rate of 35%. Here’s how much Alex could save by using these year-end tax strategies:
| Strategy | Contribution | Tax Savings |
|---|---|---|
| Maximize 401(k) | $23,000 | $8,050 |
| Contribute to IRA | $7,000 | $2,450 |
| Maximize HSA | $8,300 | $2,905 |
| Offset Losses | $3,000 | $1,050 |
| Charitable Donations | $10,000 | $3,500 |
| Total | $51,300 | $17,955 |
With a little effort, Alex saves nearly $18,000 in taxes. That’s money they can now use for other goals.
If you’d like to see how these strategies could work for you, reach out. Let’s figure out the best way to lower your taxes and keep more of your money.
For expert advice on tax planning and year-end tax strategies, reach out to us by visiting our home page or filling out our online form to request a Free Consultation.
