Although we still have two months to go, it’s best to get to the task of noodling over our tax-related housekeeping. The decisions you make will be those intended to optimize total taxes—in other words, to minimize the sum of taxes owed for the tax years 2024–2025 estimated. End-of-year tax planning means checking your income, deductions, and payments to make certain things tax-related line up before deadlines. That way you’re not scrambling to take advantage of last-minute solutions or worrying about potential missed opportunities that may have saved you money.
Identifying potential tax-saving opportunities, such as deductions and credits, will minimize your tax liability, and proactive planning ensures you have the time needed to gather the necessary documents, make informed decisions, and avoid the stress of last-minute filing or requesting a filing date extension.
Here Are the Most Important Suggestions
1) Find a good tax professional.
This will mean fees, of course, but it is possible your tax savings could well exceed the fees you will be charged. Here’s how:-
- Ask for referrals: Start by asking friends, family, or colleagues for recommendations. Personal referrals can be quite valuable.
- Check credentials: Certified public accountant (CPA), enrolled agent, or tax attorney.
- Verify experience: Experience with your specific tax situation (whether it’s self-employment, real estate, investments domestic or foreign).
- Background checks: Reviews, ratings, and complaints on relevant websites.
- Fees: Quotes from professionals to gauge the range of fees and services.
- Interview: Consultations to discuss your needs and see if you like their communication style and approach.
2) Check paycheck withholding.
You might think a big fat refund from the Internal Revenue Service each year is great, but getting that refund means you were loaning the government your money for free. Your goal should be to get as close to zero as possible.3) Defer income.
If you’re a W2 employee, the only deferral possibly available may be a discretionary bonus. But if you’re self-employed, you have far more deferral options. Near year-end, send your invoices out to your clients and customers to receive their payments early the next year. But do not do this if you expect that next year your tax bracket will be higher than this year. In that case, do the opposite: pull in as much as you can in the current year, perhaps even offering early pay discounts.4) Adjust retirement account contributions.
The 401(k) contribution limit is $23,000 in 2024. It will go up $500, to $23,500, in 2025. If you are age 50 or older by Dec. 31, the catch-up contribution limit is $7,500 in 2024 and 2025. This is probably your best and greatest opportunity to defer taxes until you retire and are in a lower tax bracket, as well as build up that retirement nest egg. At the very least, increase your deduction to get all the company match that is offered.5) Use the gift tax exclusion.
The gift tax is imposed on the transfer of money or property (stocks, vehicles, collectibles, real estate) to other people. The 2024 annual gift tax exclusion is $18,000 per person, each recipient. For married couples, the limit is $18,000 for each giver, for a total of $36,000.6) Assess tax deductions and credits.
If you own a home or rental property, you likely have your estimated property taxes rolled into your monthly mortgage payments. If not, however, you can reduce your taxable income by paying your property tax for the year in full by Dec. 31. That way, you can write off your property taxes when you file your return. A simple end-of-year strategy to stretch the mortgage interest deduction is to make your January mortgage payment before Dec. 31, assuming you are advantaged enough to itemize deductions rather than taking the standard deduction.Summary
We’ve touched on the predominant and most common tax-related considerations. It may be difficult to estimate the change in your tax bracket this year versus next, but pulling in or pushing out deductions and credits depends upon this tax change year over year. There are many other more obscure deductions and credits, such as the electric vehicle credit for 2024—$7,500 for a new EV and $4,000 for a used EV.There is also the residential clean energy credit. The credit is 30 percent of the costs of qualified clean energy home upgrades installed anytime from 2022 through 2032. Qualified upgrades are solar electric panels, solar water heaters, geothermal heat pumps, fuel cells, and wind turbines. Even the direct labor costs of installation could qualify for this credit.
End-of-year tax planning can make a significant difference in your financial health. Taking these steps can lead to appreciable tax savings and better financial planning, these should become habits for us all. The presidential election is soon, and each candidate has his or her own ideas for tax changes beginning in 2025. So, it may be a good idea to check on those following the election.
