8 Year-end Tax Savings Strategies
As we approach the end of 2024, it’s the perfect time to review your tax situation and save some money this year and/or ensure you’re limiting your lifetime tax liabilities. Today, I am going to cover 8 year-end tax savings strategies you might want to consider.
1. Retirement Plan Contributions
There are limits and restrictions on what you can contribute, but ensure you are taking advantage of retirement plans to set aside money for the future, whether it be in a tax-free Roth 401(k), or Roth IRA, or a traditional 401(k) or IRA.
People who are in a high tax bracket will probably want to use the traditional accounts to defer income, and if you’re in a lower bracket, you’ll probably want to go the Roth direction. You’ll want to be mindful of the contribution limits for 2024, and if your employer offers a match, like 3% or 6% or whatever, you will certainly want to max that out.
2. Tax-Loss Harvesting
For those of you who have seen some of my other videos, you will know this one isn’t my favorite strategy because it means you’ve lost money, but it can be a good tool for saving taxes in some years. Tax-loss harvesting is a strategy used to reduce taxes owed by selling investments that have lost money. Investment losses can be sold to recognize a tax loss to offset any realized gains and/or up to $3,000 of ordinary income per year.
3. Tax-Gain Harvesting
As you might have guessed, tax-gain harvesting is the opposite of tax-loss harvesting. Why would you want to harvest gains? Well, if you are in a lower tax bracket, you can recognize long-term capital gains and pay zero tax. In 2024, the 0% tax bracket for long-term capital gains applies up to a taxable income of $47,025 if you’re filing as an individual and up to $94,050 for married couples filing jointly.
4. Roth IRA Conversions
These are one of our best tools to limit lifetime tax liabilities!
A Roth conversion means converting tax-deferred money to a Roth IRA. If you have tax-deferred money in 401(k), 403(b), or any tax-deferred retirement account, you can simply roll that money to a traditional or rollover IRA and then convert it to a Roth IRA.
You can hypothetically convert it all at once, but you probably won’t want to do this if you have a sizable amount in a tax-deferred account because any amounts converted will be taxed as ordinary income. So, you will probably want to do this over the course of multiple years by filling up lower income brackets in your gap years, which are the years between your retirement and Required Minimum Distribution (RMD) age.
Now, once the money is in a Roth IRA, and the account is qualified, it won’t be subject to future taxes at all. Also, Roth IRAs are not subject to required minimum distribution, and beneficiaries can inherit Roth accounts tax-free. This is an important tool because when do we want to pay taxes? Well, we want to pay them when they are the cheapest, right?
2024 and 2025 are attractive for Roth conversions because we have historically low tax rates because of the Tax Cuts and Jobs Act of 2017. This is set to expire after 2025, so it might make sense to convert an amount that will take advantage of our historically low ordinary income tax brackets.
Convert or Harvest Gains?
Now, you might ask: “Well, what if I am retired and have investment gains I could harvest, and I have tax-deferred money that I can convert? Which should I do?” Good question and everyone’s situation is different, but as a rule, I believe it’s generally better to do Roth conversions rather than try to recognize 0% capital gains.
Why is that? Well, first, our capital gains and qualified dividend brackets have lower (or preferred) rates compared to our 7-bracket ordinary income rates. So, we want to get the potentially higher taxed money moved first to lower this future tax bomb.
2nd, tax-deferred money has required minimum distributions, so Uncle Sam can take his pound of flesh at some point no matter if you need the distribution or not.
3rd, if do not sell appreciated securities until death – you get the step-up in basis - which means your beneficiaries would receive the stock at whatever value the stock was when you passed rather than the price you purchased it.
Now, tax savings strategies 5, 6, 7, & 8 pertain to charitable giving, and they may overlap or you can use a couple of strategies together.
5. Charitable Donations of Appreciated Stock
As you may know, you can use after tax dollars to get a charitable deduction. And this can reduce your amount of taxable income, but, if you donate appreciated stock, you can get a deduction for the full fair market value of the stock, and you won’t have to recognize any gain on the appreciated stock. So the charity gets the full amount, you don’t pay any tax on it, and they can sell the stock and not pay taxes since they don’t have to pay taxes.
6. Donate to a ‘Donor-advised Fund’
This will work like a “charitable IRA.” You can contribute cash or appreciated securities (like in the previous example) to the fund and receive an immediate charitable deduction equal to the fair market value of the contribution. You can then invest the proceeds, which can earn income on a tax-free basis. Then, moving forward, you can use the donor-advised fund (DAF) to pay out to whatever qualified charitable organization you choose.
7. Bunching or Stacking Deductions
Since our current standard deductions are relatively high, most of us (around 90%) are not itemizing deductions. But if you give charitably, you can donate multiple years at once to receive a large, itemized deduction all in one year and then use the standard deduction in other years. And you can donate this to your donor advised fund to accomplish this, and then decide where and when to send money out of your donor advised fund.
For example, let’s say you are married and typically give $10,000 a year to charities, and this year your total itemized deductions are $25,000 before giving to charities. Well, this is under the standard deduction of $29,200 for 2024. But if you ‘bunch’ or ‘stack’ your charitable deductions into $30,000 every third year, then you can itemize and add the $30,000 to the $25,000 this year for a total itemized deduction of $55,000. If you are in the 24% tax bracket, this increase in itemized deductions would decrease your taxes by $6,192 ($25,000 + 30,000 – 29,200 = $25,800, then multiply by .24 = $6,192).
8. Qualified Charitable Distributions (QCDs)
This one is only for clients over the age of 70.5 with money in a tax-deferred IRA. With this one, there is no deduction, buy you are able to use pre-tax money to donate, so it never shows up on your tax return at all - so it’s actually more beneficial than a deduction. If you use this one you will need to ensure the money goes directly from your IRA to the charity - it can't go to your bank accounts at all or you will have to pay tax on it.
You will also need to tell your tax preparer that you made a qualified charitable deduction (QCD) because custodians do not note this on the tax forms the send out. If you are subject to RMDs, you can send all or part of the RMD to a charity to get the benefit of a QCD.
Bottom line:
These are 8 year-end tax strategies to help you save money on taxes this year (or future years depending on your personal situation). If you have any questions regarding these strategies, feel free to schedule a call below.
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