Year End Tax Planning Tips
The holiday season is underway and 2024 is winding down. Tax season is only a month away. There is still time to take steps to reduce your tax liability and to ensure your return is accurate. An accurate return avoids delays in processing which can slow down refunds. Now is the time to act.
- Gather and organize your tax records. Do not file your return until you have all the documents you need such as:
-W-2s, and 1099-NEC
-Other records of income such as unemployment, retirement/pension, interest,
and dividends
-Cryptocurrency transactions
-Sales of real estate, stock and other property
-Receipts for deductible expenses
- Calculate your withholding and estimated tax payments
You are required to pay your taxes throughout the year either through withholding or estimated payments. Failure to pay enough taxes into the system can result in a penalty. (See https://magdaabdogomezlaw.com/time-for-a-tax-check-up/) Although there is not much time left to adjust your withholding, now is the time to check and consider making an adjustment to your withholding or making an estimated tax payment by January 15, 2025 in order to avoid an estimated tax penalty.
- Harvest your Investment Losses
If you have realized capital gains during the year and are planning to sell capital assets determine whether any of these sales will generate losses. If so, sell off assets by December 31, 2024 so that you can offset the capital gains with the capital losses. If you have more losses than gains you can offset $3,000 of other income with the losses. Any additional losses can be carried over to next year.
- Deferral and Acceleration of Business Income and Expenses
Consider whether it is possible to defer the receipt of income until 2025 and accelerate deductible expenses to 2024. If acceleration and deferral are available, a tax calculation should be made to determine if doing so would be beneficial.
- Maximize contributions to retirement plans
The contribution limit for a 401(k) plan is $23,000 if you are under the age of 50. If you are over 50 you may contribute $30,500 to a 401(k). The deadline to contribute is December 31, 2024.
The contribution limit for an IRA is $7,000 if you are under the age of 50. If you are over 50 you may contribute $8,000. The deadline to contribute is April 15, 2025. This deadline is not extended even if you obtain an extension to file your return.
- Flexible Spending Accounts (FSA)
A flexible spending account allows you to set money aside to pay for out-of-pocket health care expenses. You do not pay taxes on the money that is set aside. However, most FSAs require you to spend the money set aside by the end of the year. If you have an FSA, make sure that you use the money set aside by December 31, 2024. Funds that are not used by the end of the year are lost.
If you believe that you will not be able to use the funds in your FSA prior to year end, review the arrangement to determine if it provides for one of two permissible options: (1) a grace period which provides for an additional 2.5 months to use the funds or (2) a rollover into the following year of up to $660. If either option is available, then determine if there is any action you are required to take prior to December 31, 2024 to avail yourself of the option.
- Health Savings Accounts (HSA)
A health savings account allows you to pay medical expenses with tax free dollars if you have a high deductible health insurance plan. See https://magdaabdogomezlaw.com/a-health-savings-account-as-a-retirement-tool/
Funds in an HSA do not have to be used within the taxable year and eligible contributions to the HSA are deductible. Contributions to the HSA must be made by April 15, 2025.
- Itemized/Standard Deduction
The standard deduction for 2024 has increased to $14,600 for single taxpayers, $21,900 for heads of household and $29,200 for joint filers. This increase, coupled with the limitation on what constitutes an itemized deduction, will generally result in the standard deduction exceeding the itemized deduction.
It is always a good idea to compare the itemized deduction with the standard deduction to determine which is higher. Now is the time to make that determination. If your deductible itemized deductions are close to exceeding the standard deduction, consider accelerating medical expenses and making charitable contributions to take advantage of a higher itemized deduction. However, make certain that accelerating tax deductions does not trigger the alternative minimum tax.
In comparing the itemized and standard deductions note that only medical expenses in excess of 7.5% of your adjusted gross income are deductible. There are also limits on the amount of charitable contribution that may be deducted. Generally, charitable contributions are deductible up to 60% of your adjusted gross income, but there are also limits of 50%, 30% and 20% depending on the type of property donated and the type of charity to whom the donation was made.
If you plan to itemize deductions, then you should start gathering documentation of the expenses which qualify as itemized deductions such as medical expenses, mortgage interest, real estate taxes, sales taxes, charitable contributions and casualty losses incurred as result of federally declared disasters.
- Required Minimum Distributions
If you have an IRA and have reached the age when minimum distributions must be made from the IRA, your annual withdrawal must be made by December 31, 2024. Failure to make the distribution can result in the imposition of an excise tax in the amount of 25% if the failure is not timely corrected. If you reached the required age during 2024, then your initial minimum distribution must be made by April 1, 2025.
- Tax Free Gifts
Take advantage of the annual gift tax exclusion by making gifts by December 31, 2024. Taxpayers can gift $18,000 per person in 2024 without incurring a gift tax or having the gift reduce their estate tax credit. There is no requirement that the donee be a family member and there is no limit on the number of persons who can receive gifts. A husband and wife, can each give $18,000 to the same person thereby transferring $36,000 free of gift tax. The gift would be free of income tax to the recipient.
Nothing contained in this article is intended to be legal or financial advice. The tax laws are complex and whether these laws apply to you depends on your personal circumstances. It is in your best interest to timely explore which laws would apply to you so that you can take any necessary steps prior to December 31.