Maximize Your Tax Savings Before Year-End

Essential Strategies to Reduce Your Tax Liability and Boost Financial Health Before December 31st.

During the holiday season, most people focus on how much to spend on gifts, travel, and celebrations. Some create post-holiday recovery plans to address holiday debt. However, very few consider maximizing their tax benefits before year-end, a critical oversight that could save significant money.

Year-end is your final opportunity to make tax-deductible charitable donations, contribute to retirement accounts, or use up Flexible Spending Accounts (FSAs). Ignoring these opportunities can mean paying more taxes than necessary. Here’s a checklist of actions to take before December 31.

Tax Strategies and Adjustments

• Maximize and Use up Tax-deductible Funds.

  • IRAs and HSAs: Most contributions to IRAs and HSAs must be made by December 31 to count toward this year’s taxes. (Traditional and Roth IRA contributions may have an extended deadline until the tax filing date—confirm specifics with your tax advisor.)

  • FSAs: Many FSAs operate on a "use it or lose it" rule, where unused funds are forfeited. Some plans offer a grace period or allow a rollover of up to $610 in 2024. Spend on eligible medical or dependent care expenses before the deadline. Use any remaining FSA funds for eligible medical, dependent care, or other expenses before they expire.
    

• Review your withholding for the year. If it’s too low, you could face penalties; if too high, you’re giving the IRS an interest-free loan. Adjust your W-4 now to optimize next year’s tax strategy.
  

• Leverage State-Specific Tax Benefits. Some states offer unique tax advantages, such as deductions for contributions to state-sponsored 529 college savings plans. Research your state’s tax guidelines to avoid missing out.

  
  

Charitable Giving and Tax Credits

• Maximize Charitable Giving. Donations to qualified charities are tax-deductible. You can also donate appreciated stocks or assets, which avoids capital gains taxes and provides an extra deduction. Always keep receipts for donations over $250.
  

• Consider a Donor-Advised Fund (DAF)

  If you’re making large charitable contributions, a donor-advised fund allows you to take the tax deduction now while distributing the funds to charities over time.
  

• Utilize the Qualified Charitable Distribution (QCD) Rule.

  If you’re 70½ or older, you can donate up to $100,000 directly from your IRA to a qualified charity. This counts toward your Required Minimum Distribution (RMD) and reduces your taxable income, making it a highly effective strategy for retirees.
  

• Claim Tax Credits. Tax credits directly reduce your tax liability and may include:

  • Child Tax Credit

  • Earned Income Tax Credit

  • Energy-efficient home improvement credits for installing solar panels, efficient windows, or other upgrades.

  These upgrades not only lower your energy bills but also reduce your tax liability.

 Retirement Contributions and Planning

• Maximize Contributions to 401(k) and IRAs: Maximize Contribution to Your 401(k). Over the past decade, the 401(k) contribution limit has increased steadily, often by $500 annually. For 2024, the maximum contribution is $23,000, with an additional $7,500 catch-up contribution for individuals aged 50 and older. Take full advantage of this by contributing as much as you can afford, especially if your employer matches contributions. Roth and traditional IRAs may have extended deadlines, but 401(k) deadlines are firm.
  

• Consider a Roth IRA Conversion: Consider a Roth IRA Conversion. Converting a traditional IRA to a Roth IRA can be a strategic move if your income is lower this year or you expect higher tax rates in the future. Be aware that the converted amount will be taxable, so plan carefully to manage the tax impact.
  

• Review Required Minimum Distributions (RMDs).

  If you’re 73 or older in 2024 (or 70½ for Qualified Charitable Distributions), ensure that you’ve taken your RMDs from retirement accounts like traditional IRAs or 401(k)s. Failure to do so results in hefty penalties—50% of the amount not withdrawn in 2023 but reduced to 25% in 2024.

  
  

Investment and Portfolio Adjustments

• Harvest Investment Losses for Tax Purposes. If you’ve realized gains from investments this year, sell underperforming assets to offset those profits. You can deduct up to $3000 in net losses against ordinary income annually, carrying forward excess losses to future years.
  

• Review Capital Gains Distributions in Mutual Funds

  If you own mutual funds in taxable accounts, check whether they’ve issued capital gains distributions. These can trigger unexpected taxable income, so be prepared to offset them with losses or adjust withholding.
  

• Consolidate or Optimize Investment Portfolios.

  Use the year-end as an opportunity to rebalance your portfolio. Ensure your investments align with your risk tolerance, goals, and market conditions.

Prepayments, Deductions, and Income Timing

• Prepay Deductible Expenses: Boost deductions by prepaying expenses like property taxes or mortgage interest. Be mindful of the Alternative Minimum Tax (AMT), which could limit the benefit of this strategy depending on your income level.
  

• Defer Income to Next Year. If you anticipate a lower tax bracket next year, consider deferring income, such as bonuses or freelance payments, to reduce your current-year tax burden.

Business Owners and Self-Employed Individuals

• Evaluate Business Deductions.

  If you’re self-employed, consider: Purchasing equipment or software that qualifies for Section 179 depreciation. Setting up a Solo 401(k) or SEP IRA to defer taxable income.

  Writing off business-related expenses like mileage, subscriptions, and home office costs.
  

• Pay Estimated Taxes. Self-employed individuals or those with significant untaxed income should calculate whether they owe estimated taxes. Paying before the deadline can help avoid IRS penalties for underpayment.

Insurance and Health Coverage

• Reassess Your Insurance Coverage. Review and update your policies for health, auto, home, and life insurance to ensure that they align with your current needs. Key insurance considerations include:
  

  • Health Insurance: Make sure your coverage is adequate for the upcoming year, especially during open enrollment. If you have a high-deductible health plan (HDHP), consider contributing to a Health Savings Account (HSA) to save on taxes and build savings for healthcare expenses.
    

  • Auto and Home Insurance: Check that your coverage levels are appropriate for your current situation. Adjust for changes in property values, vehicles, or personal assets.
    

  • Life Insurance: Among the various types of life insurance, whole life insurance can offer significant tax benefits over term life insurance. While term life provides affordable, tax-free death benefits, it doesn’t accumulate cash value. In contrast, whole life insurance grows cash value on a tax-deferred basis, which can be borrowed against tax-free up to your cost basis. Though more expensive, whole life offers both death benefits and a savings component, making it a better choice for long-term tax planning. However, consult a financial professional to determine the best policy for your financial goals and tax planning needs.

Estate and Wealth Planning

• Use Gift Tax Exclusion for Estate Planning

  If you’re planning to transfer wealth to loved ones, use the annual gift tax exclusion before December 31. For 2024, you can gift up to $17,000 per person without triggering gift tax consequences.
  

• Plan for Education Expenses

  Contribute to 529 college savings plans to take advantage of state tax deductions (if applicable) and plan for future education costs.
  

Year-End Budget and Debt Review

• Pay Off High-Interest Debt

  While this isn’t a direct tax strategy, reducing high-interest debt before the new year can improve your overall financial health and prepare you for upcoming expenses.
  

• Prepare for Upcoming Changes. If you anticipate significant changes (e.g., marriage, starting a business, having children), consult a financial planner to prepare for the tax and financial implications.

Miscellaneous Strategies

• Defer Large Expenses for Better Tax Timing.

  If your deductions this year are already high, consider deferring significant deductible expenses (e.g., medical bills, donations) into the next year to maximize their tax impact.
  

• Review Retirement Account Designations

  Double-check that the beneficiaries for your 401(k), IRAs, and other accounts are accurate and reflect any life changes (e.g., marriage, divorce, births).
  

  
  

Year-end tax strategies can be complex, and a tax professional can help identify personalized opportunities. While many of the strategies listed can reduce tax liability, it's important to consider whether you qualify for them. Taxpayers who claim the standard deduction won’t be able to benefit from certain deductions, such as charitable donations. However, for those who itemize deductions, these strategies can provide significant savings. Always consult with a tax professional to determine the best approach for your specific tax situation. Whether it’s the best accounts to fund or the impact of this year’s decisions on next year’s taxes, expert advice ensures you’re optimizing your financial outcomes.

By taking these proactive steps, you can minimize your tax liability, maximize savings, and head into the new year in a stronger financial position.

Also Read:

1. 20 Questions to Slash Your Credit Card Payments & Boost Your Score

2. Budgeting for Unexpected Expenses During the Holidays

3. Holiday Debt Detox: Recover from Holiday Spending and Prepare for Next Year