As the clock ticks down on 2024, there’s still time to optimize your tax strategy and lower your tax bill before the year ends. With potential tax increases looming after 2025, these actionable last-minute tax hacks can help you save money now while positioning you for future success.
Here are 15 tips that could make a significant difference in your tax planning:
1. Max Out Tax-Advantaged Contributions
Retirement Accounts: Contribute to your 401(k), 403(b), or other workplace retirement plans by December 31, 2024. The contribution limit for 2024 is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and older.
Health Savings Accounts (HSAs): If you have a high-deductible health plan, contribute up to $4,150 for self-only coverage or $8,300 for family coverage by the tax deadline in April 2025. HSA contributions lower your taxable income, and unused funds can grow tax-free for future medical expenses.
2. Use Tax-Loss Harvesting
Offset gains from investments by selling underperforming assets. Tax-loss harvesting allows you to reduce your taxable income by up to $3,000 annually with losses, and any unused losses can carry forward indefinitely. Be mindful of wash sale rules (cryptocurrencies are exempt).
3. Consider a Roth IRA Conversion
Converting your pre-tax IRA funds to a Roth IRA can be beneficial, especially with future tax rate increases on the horizon. Although you’ll owe taxes on the converted amount now, future growth and withdrawals after age 59 ½ will be tax-free. Calculate the potential benefit using a Roth conversion calculator.
4. Assess the Benefit of Itemizing vs. Taking the Standard Deduction
For 2024, you’ll benefit from itemizing deductions if they exceed:
- $29,200 for married couples
- $14,600 for single filers
Eligible deductions include medical expenses (exceeding 7.5% of your adjusted gross income), mortgage interest, state and local taxes (up to $10,000), and charitable contributions.
5. Claim Education Tax Breaks
The American Opportunity Tax Credit provides up to $2,500 per student for qualified education expenses. Consider prepaying tuition for the first quarter of 2025 before the year’s end to maximize your 2024 tax benefits. Additionally, check if your state offers tax deductions for contributions to 529 college savings plans.
6. Defer Income
Freelancers and gig workers can delay invoicing until January 2025 to reduce taxable income for the current year. W-2 employees may also be able to defer bonuses or other compensation. Consult with your tax advisor to determine if this strategy works for you and how it aligns with your financial goals.
7. “Bunch” Charitable Contributions
Maximize itemized deductions by grouping multiple years’ worth of charitable contributions into 2024. This strategy can help you exceed the standard deduction this year and take the standard deduction in future years. Donor-advised funds (DAFs) are a flexible option for this approach.
8. Donate Appreciated Assets
Donate long-term appreciated stocks or mutual funds to a charity to avoid paying capital gains tax while receiving a deduction for the fair market value of the assets. Be mindful of limitations—deductions for appreciated property are capped at 30% of your adjusted gross income (AGI).
9. Don’t Forget Donations of Cash and Property
You can also deduct cash donations and property contributions if you itemize. For instance, donating used furniture or other items can offer tax relief. Keep in mind that the IRS requires different types of documentation depending on the value of the donation.
10. Gift to Loved Ones
Give up to $18,000 per recipient in 2024 (or $36,000 for married couples) to reduce your estate’s taxable value. Gifts to recipients are not taxable to the recipient, and you won’t get an income tax deduction, but it can help reduce estate tax liability. The annual gift limit increases to $19,000 per recipient in 2025.
11. Take Required Minimum Distributions (RMDs)
If you’re 73 or older, make sure you withdraw your RMD by December 31, 2024, to avoid hefty penalties. If this is your first RMD, you may be able to defer until April 1, 2025, but that means you’ll need to take two RMDs in the same year, potentially increasing your taxable income.
12. Reduce RMDs with Qualified Charitable Distributions (QCDs)
For joint filers aged 73 or older, you can donate up to $105,000 from your IRA directly to charity through a QCD. This amount satisfies your RMD requirement and is excluded from taxable income, reducing your overall tax bill.
13. Maximize Depreciation Deductions
If you own rental property or other depreciable assets, ensure that you’re fully utilizing depreciation deductions. The IRS allows for accelerated depreciation, meaning you can deduct a significant portion of the property’s value in the early years. Consult with a tax professional to see how depreciation can lower your tax bill.
14. Use Flexible Spending Accounts (FSAs)
If your employer offers a Flexible Spending Account (FSA) for medical or dependent care expenses, make sure to use up the funds by December 31, 2024. FSAs allow you to set aside pre-tax money for eligible expenses, and unused funds often don’t roll over, so use them or lose them.
15. Review Tax Withholding and Make Adjustments
If you’ve had significant changes in income or deductions this year, adjust your tax withholding before the end of the year. Doing so can help prevent underpayment penalties or a surprise tax bill. Use the IRS withholding calculator to ensure you’re withholding the correct amount.
Plan for 2025 and Beyond
As you consider your tax strategy for 2024, also think about planning for the future. With 2025 tax brackets adjusted for inflation, you may have more room before hitting a higher tax rate.
Be proactive in building a flexible tax plan with the help of a trusted tax advisor. Planning ahead can help you take advantage of tax-saving opportunities and ensure compliance with the latest IRS regulations.
By implementing these last-minute tax hacks, you could save thousands of dollars on your 2024 tax return and set yourself up for future tax success.
