December 5, 2023

Year-End Tax Planning Tips for Individuals to Maximize Savings and Minimize Tax Burdens  

As we near year-end, it’s important to be aware of the latest tax tips and guidelines to maximize your financial potential for 2024. Make sure you’re taking advantage of donations, cash gifts and more deductible activities to minimize your tax burden. When in doubt, consult with a trusted tax professional to determine whether certain deductible activities apply to your circumstances. While this guidance is geared towards individuals and families, check out our year-end tax planning tips for businesses

Make the Most of Your Charitable Donations 

By donating to a qualified charity, individuals can claim deductions on their tax returns, which reduces their overall taxable income. You may deduct your charitable contribution by filing Form 1040 and itemizing deductions on Schedule A. Please note that if you receive something in return for your charitable contribution, such as tickets to a sporting event or other goods or services, you must deduct only the amount of your contribution that exceeds the fair market value of what you received.  

Keep records of your donation, such as a bank record, payroll deduction or written communication. If you donated via text message, your telephone bill can meet the requirement for record keeping as long as the bill contains the name of the charitable organization, the amount donated and the date of the donation. These details are required to deduct a contribution of cash, check or other monetary gifts.   

Take Advantage of the Annual Gift Tax Exclusion  

Taxpayers can take advantage of the annual gift tax exclusion limits before year-end by strategically gifting money to their loved ones. Currently, the annual gift tax exclusion limit is $17,000 for individuals and $34,000 for married couples. The limit is per recipient, for example, a taxpayer could gift $17,000 to their son and an additional $17,000 to their daughter. Likewise, a married couple could gift a total of $34,000 to each of their children to maximize their gifting without incurring any gift tax. It is important to note that these gifts must be made before the end of the calendar year to qualify for the exclusion, so if this is an area you’ve neglected, make your gifts as soon as possible.  

Max out Your Retirement Contributions 

Maxing out your retirement contributions before the end of the financial year has several tax benefits. One of the main advantages is that contributions to retirement accounts, such as a 401(k) or an IRA, are potentially tax-deductible. By maximizing your contributions, you can reduce your taxable income for the year, possibly lowering your overall tax liability. This means that you might be able to save on your current year’s taxes and have more money available to invest in your retirement. 

Additionally, by contributing the maximum amount to your retirement accounts, you also take advantage of tax-deferred growth. This means that any earnings or interest generated within the account are not taxable until you withdraw the funds in retirement. This can lead to significant tax savings over the long term, as your investments have the opportunity to grow and compound without being diminished by annual taxes.  

Remember to Take Your RMDs 

Taking required minimum distributions (RMDs) from 401(k) and IRA plans before year-end is mandatory for retirement plan holders aged 72 or older. Failure to withdraw the required amount can result in a hefty excise tax on the distribution shortfall, which can significantly deplete retirement savings. By taking the RMDs before year-end, individuals can ensure compliance with the IRS rules and avoid unnecessary penalties. 

Consider Converting to a Roth IRA 

Converting to a Roth IRA can provide individuals with several benefits. Firstly, contributions to a Roth IRA are made with after-tax dollars, meaning that withdrawals in retirement are tax-free. This can be advantageous for taxpayers who expect their tax rates to be higher in the future, as they can avoid paying taxes on their retirement savings at higher rates.  

Additionally, Roth IRAs do not have RMDs during the account holder’s lifetime, allowing individuals greater flexibility in managing their retirement income. Furthermore, unlike traditional IRAs, Roth IRAs allow for penalty-free withdrawals of contributions at any time, making them a more accessible option for emergency funds or other financial needs.  

Optimize Your Payroll Deductions and Other Benefits 

Optimizing your compensation and benefits package from your job before year-end can provide significant tax benefits. Increasing your contributions to retirement accounts, such as a 401(k) or IRA, can reduce your taxable income for the year, resulting in a lower tax liability. Additionally, taking advantage of employer-provided benefits, such as health savings accounts (HSAs) or flexible spending accounts (FSAs), can allow you to set aside pre-tax dollars for medical expenses or dependent care, further reducing your taxable income.  

This is a particularly good strategy if your workplace offers benefits like a 401(k) or HSA and FSA match program. Keep your age in mind as well: if you’re over 50, you’re eligible for an additional $7,500 catch-up contribution for 401(k) accounts. Those 55 or older are eligible for an additional $1,000 catch-up contribution for HSA accounts. 

Invest in a 529 College Savings Account 

Maximizing 529 college savings accounts before year-end can offer several tax benefits. One major advantage is the potential for tax-free growth on the invested funds. Any earnings from the investments within the account can grow tax-free as long as they are used for qualified educational expenses.  

Additionally, many states offer tax deductions or credits for contributions made to 529 plans, providing an opportunity for further tax savings. By maximizing contributions to a 529 plan before the end of the year, individuals can take advantage of these tax benefits and potentially reduce their overall tax liability while saving for future education expenses. Starting in 2024, unused funds from a 529 plan will be allowed to rollover into a Roth IRA account.

Consider Tax-Loss Harvesting to Offset Capital Gains 

Tax-loss harvesting is a strategy used by investors to offset capital gains with capital losses, resulting in potential tax savings. By selling investments that have experienced a loss, investors can use those losses to offset any capital gains they may have incurred from other investments. This allows them to reduce their taxable income, potentially lowering their overall tax liability.  

The tax benefits of tax-loss harvesting can be significant, as it helps investors minimize the amount of taxes they owe on their investment gains. It’s particularly valuable for high-net-worth individuals who may have substantial capital gains to offset. Additionally, tax-loss harvesting can be carried forward to future years, allowing investors to take advantage of losses beyond the current tax year.  

Anders Tax advisors stay on top of the latest tax legislation to provide forward-thinking, personalized guidance for our clients. Request a meeting with an Anders advisor below to learn more about our tax planning services and the associated costs. 

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