As 2024 winds down, the clock is ticking for you to make critical financial decisions that could significantly lower your tax bill. With tax brackets set to increase in 2025 unless Congress acts to extend certain provisions of the Tax Cuts and Jobs Act, there’s no better time to implement effective tax strategies. Taking charge of your year-end tax planning now can help you make the most of existing opportunities, reduce your taxable income and position yourself for greater financial success in the future. Here’s a clear and actionable year-end tax planning checklist to get you started.
Contributing to tax-advantaged accounts can help you reduce taxable income while preparing for the future. Here’s how:
Flexible Spending Accounts (FSAs), often offered by employers, allow pretax contributions for medical or dependent care expenses. Money that goes into these accounts avoids income taxes and Social Security taxes. However, keep in mind these accounts are subject to a “use it or lose it” rule. Typically, unused funds by the end of the year are forfeited, though some employers may grant an IRS-approved grace period extending until March 15, 2025. Review your plan and spend the remaining balances strategically to avoid waste.
Year-end is a great time to review your investment portfolio through a tax lens. Tax-loss harvesting involves selling investments at a loss to offset gains from other investments, thereby reducing your taxable income. Key points to remember:
Considering your long-term financial goals when making investment decisions is critical.
4. Consider a Roth Conversion
If your income exceeds the limits for Roth IRA contributions, converting savings from a traditional IRA to a Roth IRA might be the next best step. The conversion amount will be taxed as income for 2024, but subsequent withdrawals in retirement will be tax-free. To maximize value, convert only enough to avoid bumping into a higher tax bracket. For example, if you expect to be in the 24% tax bracket for 2024, convert only enough to stay within that bracket.
Income is typically taxed when received, so pushing income into 2025 can help reduce your 2024 tax burden—provided you expect to stay in the same or a lower tax bracket next year. This strategy benefits the self-employed, freelancers or those expecting a year-end bonus who can ask to defer.
For examples:
For those who itemize tax deductions, charitable gifts offer significant tax savings opportunities, especially when implemented strategically:
For 2024, the annual gift tax exclusion lets you transfer up to $18,000 per recipient without it counting against your lifetime estate and gift tax exemption. Although gifting doesn’t reduce your own taxable income, it’s an efficient way to transfer wealth to heirs while potentially lowering the value of your taxable estate.
As you plan your tax strategies, don't forget about required minimum distributions (RMDs). If you’re 73 or older, you’re required to take RMDs from tax-deferred accounts like traditional IRAs by December 31, 2024. For those who turn 73 in 2024, the first RMD deadline extends to April 1, 2025—but taking both 2024 and 2025 RMDs in the same tax year could push you into a higher bracket.
Failure to take RMDs on time results in a steep 25% penalty (reduced to 10% if corrected within two years). To avoid surprises when preparing your tax return, factor this distribution into your tax planning now. Note that Roth IRAs are exempt from RMDs for the original account owner.
Tax planning is as much about your future as it is about reducing this year’s tax bill. With inflation-adjusted brackets around the corner in 2025, every financial situation requires careful consideration and a personalized approach. Creating a year-end tax planning checklist and taking proactive steps before December 31 can leave you well-prepared for what’s next.
Consulting a tax advisor or financial professional can help you optimize strategies that align with your unique circumstances. At LTax, we take a personalized approach, delivering strategic tax solutions that will set you on the path to continued financial success. Contact an LTax financial advisor today to create a tax plan that works for you.
LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.