As the year draws to a close, it’s the perfect time to review your financial picture and implement strategies to minimize your tax burden. Proactive year-end tax planning can save you money and help you achieve your financial goals more effectively. Here are five key strategies to consider before December 31.
1. Maximize Deductions
Deductions play a critical role in reducing your taxable income. Here are ways to ensure you’re taking full advantage:
- Health Savings Accounts (HSAs): If you have access to an HSA, contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses. The 2024 contribution limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution allowed for those age 55 and older. Consider maximizing your contributions by year-end if you haven’t already.
- Itemized Deductions: Review your eligible expenses for state and local taxes, mortgage interest, medical expenses, and charitable contributions to determine if itemizing outweighs the standard deduction.
- Charitable Giving: If you’re considering making a charitable contribution, now is the time. Donating appreciated securities instead of cash can provide a double benefit by avoiding capital gains taxes. If you already gift to charities and are consistently close to itemizing but can never get over the hump, then consider a charitable lumping strategy, which consists of making multiple years of charitable contributions in one year to push you over the threshold to itemize.
- Prepay Deductible Expenses: If you’re close to the threshold for itemizing, consider prepaying deductible expenses such as property or state taxes. Be aware of the $10,000 state and local taxes (SALT), which includes property taxes. If you’ve already paid more than $10,000, then prepaying won’t be of benefit to you.
2. Take Your Required Minimum Distributions (RMDs)
If you’re age 73 or older (or age 72 if you reached that age prior to 2023), you must take RMDs from your traditional IRA, 401k or other qualified retirement plans.
- Timing Matters: Missing the December 31 deadline for RMDs can result in a penalty equal to 25% of the required withdrawal amount.
- Consolidate Accounts: If you have multiple retirement accounts, ensure you calculate and withdraw the appropriate RMD from each account. Keep in mind that you cannot combine RMDs from IRAs and 401k plans.
3. Utilize Qualified Charitable Distributions (QCDs)
For individuals aged 70½ or older, QCDs allow you to donate directly from your IRA to a qualified charity.
- Benefits: QCDs count toward your RMD and are excluded from your taxable income, which can be especially valuable if you don’t itemize deductions.
- Annual Limit: The maximum annual QCD amount is $105,000 per individual. If you’re married and file jointly, each spouse can donate up to this limit from their respective IRAs.
- 1099-R: If you chose to utilize this strategy, it is important to maintain your records for these contributions since the custodian will still report this as taxable income, and it is your responsibility to report that these distributions went to qualified charities.
4. Meet Safe Harbor for Tax Withholding
Avoid an unpleasant surprise at tax time by ensuring you’ve met your safe harbor requirements for tax withholding or estimated tax payments. The underpayment penalty interest rate is 8% (applied quarterly) in 2024, which is more meaningful than in recent years when it was as low as 3% in 2021.
- Safe Harbor Rules: Generally, you won’t face penalties if you’ve paid at least 90% of your current year’s tax liability or 100% of your prior year’s tax liability (110% for high-income earners).
- Check Withholding: If you’re behind on payments, you may still have time to adjust your withholding with your employer or make an additional estimated tax payment before January 15, 2025.
5. Monitor Medicare IRMAA Tiers
For retirees enrolled in Medicare, or will start Medicare in the next two years, the Income-Related Monthly Adjustment Amount (IRMAA) can significantly impact your premiums.
- Threshold Awareness: Medicare premiums are based on your Modified Adjusted Gross Income (MAGI) from two years prior. If you’re close to a tier cutoff, deferring income or accelerating deductions could save you hundreds, if not thousands, of dollars annually.
- Planning Opportunities: If you’re selling assets or taking withdrawals from retirement accounts, consider how this might push your income into a higher IRMAA tier. You may consider Roth Conversions to maximize your income in the lower tiers if it means avoiding the higher tiers in late retirement.
Take Action Now
Year-end tax planning is an essential part of your overall financial strategy. Implementing these steps now ensures you’ll not only reduce your tax liability but also stay aligned with your long-term financial goals.
If you’re unsure how these strategies apply to your situation, we’re here to help. Contact Total Wealth Planning today to schedule a year-end review with one of our advisors. Together, we can create a tailored plan that maximizes your tax savings and sets you up for success in the year ahead.
At Total Wealth Planning, we specialize in helping individuals and families optimize their finances with a comprehensive approach. Let us guide you through every step of your financial journey.
About the author. Chris Allen, CFP® is a wealth advisor and the Director of Financial Planning at Total Wealth Planning, a fee-only fiduciary financial planning firm in Cincinnati (Blue Ash), Ohio. Chris assists clients in creating a sound financial future while serving on the Firm’s Investment Policy Committee and technical financial planning team. Prior to joining the Firm in 2015, Chris worked as a Certified Financial Counselor with a non-profit financial counseling organization, where he consulted with numerous families and helped establish sustainable spending plans. Chris can be reached at callen@twpteam.com.
