With 2025 fast approaching, year-end planning is in order. And in the remaining days of 2024 you can make tweaks to keep more of your dollars in your pocket.
End-of-year planning is vital. It's time to get a handle on your taxes and minimize what you owe the IRS. Also, fine-tune your portfolio. Take stock of your 401(k). Evaluate your retirement readiness. Eyeball your estate plan. And give thought to tax-friendly charitable giving.
"If you don't know what you've got, how can you plan to get to where you want to be?" said Lisa Featherngill, senior vice president and national director of wealth planning at Comerica Wealth Management.
Get Ahead Of Year-End Planning
What's the downside of not doing year-end planning?
"The risk is that you could leave money on the table," said Stewart Willis, president and high-net-worth advisor at Asset Preservation Wealth & Tax.
Willis says the final three months of the year are a huge time for financial advisors and clients. Doing a year-end checkup makes clients "aware of all the land mines that might be laying out there," said Willis.
A big wild card heading into 2025 is whether Congress will extend the tax provisions of the 2017 Tax Cuts & Job Act (TCJA). If lawmakers don't act, the so-called Trump tax cuts will expire at the end of 2025. And tax brackets and other provisions will revert back to the higher 2017 rates.
That's a reason why Featherngill sees opportunity in the remaining days of 2024. The idea is to take advantage of today's lower tax rates while you can in the event that taxes go up in 2026.
Guesstimate Your Tax Bill
Keeping more cash in your coffers means taking steps near year-end to lower your tax liability when Tax Day rolls around in April.
Now's the time to guesstimate what your taxable income will be in 2024. You should project how much tax you'll pay this year based on payroll deductions and quarterly tax payments, says Mark Steber, chief tax information officer at Jackson Hewitt, a tax preparation service.
Eyeball your last pay stub through Oct. 31. And add in additional income and taxes to be withheld in the final two months of the year.
It's good to get an idea if you will owe Uncle Sam money or are getting a refund.
If it looks like you will have to cough up more cash to satisfy Uncle Sam, there's still time left to take action. If you haven't maxed out your traditional 401(k), which reduces your taxable income, boost contributions in remaining paychecks. Or max out your IRA. And if you're 50 and older, you can get an additional tax deduction of $7,500 on your 401(k) for catch-up contributions, and $1,000 off for IRAs if you're 55 or older.
Deferring income could also save you money on taxes. If you are due a bonus or were considering cashing in stock options, wait till next year so you can push the income into 2025.
Step Up Deductions For Year-End Planning
If you itemize deductions on your tax return, accelerate deductions before year-end, Steber advises.
You can do that by making your January mortgage payment before Dec. 31 to boost the size of your interest deduction. You can also go the philanthropic route by giving to charity and boosting your tax deduction further. If you've been planning on buying an electric car, fast-forward the purchase of a qualified vehicle to 2024 so you can qualify for a tax credit of up to $7,500. And if you're a small-business owner and were planning on purchasing some new equipment, accelerate the purchases and buy before Dec. 31 to take the tax deduction now.
Minimize Tax Liabilities On Investments
Sure, the stock market has been zooming higher. But any losers in your portfolio are great candidates for tax-loss selling.
"Everybody's got some dead ones in their portfolios," said Steber. "Dump those losers and offset some gains."
Harvesting your losses allows you to offset your gains. And if your capital losses exceed your capital gains, you can use those losses to offset up to $3,000 in regular income.
If you believe tax rates are heading higher in the future, consider converting a traditional IRA into a Roth IRA. A Roth savings vehicle allows for tax-free withdrawals in retirement. The taxes you pay on the dollars moved to the Roth IRA will be paid at today's lower income-tax rates.
The Roth can reduce income when you take withdrawals. And that can lessen potential fallout from incurring too much income that results in paying taxes on Social Security or paying higher Medicare premiums. "A Roth helps diffuse the tax time bomb," said Willis.
Take Advantage Of Tax-Friendly Investment Accounts
There's still time to boost contributions to tax-advantaged accounts, such as 529 college savings plans. They don't give you an immediate deduction. But they lock in tax-free withdrawals.
Also consider health savings accounts, which are triple tax advantaged. HSAs, which are available to Americans with high-deductible health plans, offer tax-deductible contributions, tax-deferred growth and tax-free withdrawals if used for eligible medical expenses.
"You need to make these deposits by year-end," said Steber. The end-of-year deadline also applies to Roth IRA conversions, funding 401(k)s and IRAs, and tax-loss selling.
Be Aware Of Potential Changes To The Tax Code
It's a bad idea to make major portfolio moves based on campaign promises and possible changes to the tax code. But it's vital to monitor the outcome for the Tax Cuts & Jobs Act.
All eyes will be on whether Congress renews or adjusts the 2017 tax law or lets the TCJA expire.
"We're in a unique situation now in that we've got only 14 months until the potential tax law changes in 2025," said Featherngill.
Back in 2017, the TCJA lowered individual tax brackets, boosted the size of the standard deduction, made adjustments to itemized deductions, doubled the child tax credit, and increased the lifetime gift and estate tax exemption.
If the tax bill sunsets, it would mean more income would be subjected to higher tax brackets. The standard deduction for joint filers would fall from $29,200 to around $16,600. The child tax credit would be cut in half to $1,000.
Mind Estate Tax Considerations For Year-End Planning
And the estate tax exemption would fall by roughly half, from $13.61 million per person today to around $7 million, according to Comerica. Americans that make gifts using their lifetime exemption can take advantage of today's higher threshold and remove any potential appreciation of those assets going forward, according to financial firm UBS.
Some high-earning households could see a larger portion of their income jump to a higher tax bracket, says Featherngill. For example, households with taxable income of $235,000 to $385,000 who are now in the 24% bracket would move up to the 33% bracket if tax rates revert to 2016 levels, according to Comerica data.
That 9% increase in taxes is motivation to start planning now to find ways to take advantage of today's lower rates.
The goal is to accelerate income into 2024 and 2025 to reduce the tax hit in 2026, says Featherngill. A Roth conversion is one way to offset the impact of potential higher tax rates.
Plan Philanthropic Giving In A Tax-Efficient Way
Another way to reduce your tax liability is to give to charity. But giving cash or writing a check to your favorite charity isn't the most tax-friendly way to give.
If you give cash, you'll just get a tax deduction for the amount you give. A better approach is to gift long-term appreciated assets, such as stocks. Why? You'll get an upfront tax deduction for the fair value of the securities you give away. And you'll avoid paying capital gains taxes on the profit you made on the investment.
"Even if the stock has doubled or tripled, you won't have to pay capital gains," said Featherngill.
Another strategy for married couples who are close to but short of reaching the 2024 itemized deductible threshold of $29,200 is to bundle two years of giving into a single tax year. So, if you were planning to give $10,000 to charity this year and $10,000 in 2025, combine the two into a single year to get a larger deduction for the $20,000.
Finally, a year-end analysis of your finances should also give you a better sense of whether you're on track to retire or if your plan needs tweaking, says Willis.
"Clients near retirement want to know, 'Can I stop working? When am I done? Am I still on track to retire?'" said Willis.
If your plan needs updating, there's nothing wrong with changing course. And there's no better time to make adjustments than before Dec. 31.
