With only six weeks left before 2025, now is the time to make essential year-end tax moves to maximize savings and avoid a large tax bill on April 15.
From maximizing your retirement accounts to donating to your favorite charity, here are four essential year-end tax planning strategies to help you slash your tax bill.
Taxpayers should try to max out their retirement accounts by the end of the year, because doing so can help reduce your tax bill and boost your retirement savings, says Robert Conzo, CFP®, chief executive and managing director of The Wealth Alliance in Melville, New York.
Each dollar you contribute to a pre-tax workplace retirement plan reduces your taxable income by a dollar in the year you make the contribution. Typically, you have until Dec. 31 to contribute to your 401(k) or similar tax-advantaged retirement plan, such as a 403(b) or 457 plan.
While the IRS adjusts the maximum 401(k) contribution amount annually, for 2024 the limit is $23,000. If you’re 50 or over, you can contribute an additional $7,500, for a total of $30,500 for the year.
“With only a couple of pay periods remaining in the year, taxpayers should quickly take a look at their 401(k) year-to-date balances to see if they have reached the annual maximum of $23,000,” says Tomika Bullet, tax principal at Windham Brannon in Atlanta.
Maybe you received a pay increase in the middle of the year, or started working after the start of the year. You may be able to add some extra contributions before the end of the year to meet the threshold fully, Bullet says.
If you don’t have a retirement plan at work, consider putting money into an IRA. The 2024 maximum IRA contribution is $7,000, or $8,000 if you’re 50 or older. You can make IRA contributions for the 2024 tax year up until April 15, 2025, so you have a little extra time.
You also can contribute to both a 401(k) and IRA in the same year, but keep an eye on income limits for deducting IRA contributions if you also have a workplace retirement plan.
Taking advantage of tax loss harvesting by selling losers within your investment portfolio before year-end can also cut your taxes. Ideally, you should determine if you could benefit from selling underperforming assets before Dec. 31 to offset any potential capital gains.
“These losses can be realized and the security can be repurchased 30 days later,” Conzo says, thus avoiding wash sale rules. “By doing this, you would create a realized loss to offset future capital gains. This is particularly useful if you believe capital gains rates will increase in the future,” Conzo says.
Be sure to follow the rules for how to determine your capital losses. For 2024, the long-term capital gains tax rates are 0 percent, 15 percent, and 20 percent, depending on your taxable income and filing status. Long-term capital gains tax rates apply to assets held longer than one year and are lower than ordinary income tax rates. Short-term capital gains are taxed at ordinary income tax rates.
Using the tax-loss harvest strategy can reduce the amount you’ll owe in capital gains taxes. Even if you don’t have enough realized capital gains for the tax year, you can use your losses to deduct up to $3,000 annually against ordinary income, and carry forward unused losses to future years.
Before employing this year-end tax strategy, speak with your tax professional to ensure it’s a good idea for you.
Making a year-end charitable contribution is a way to reduce your taxes even as you’re helping others. But there is a major hurdle: You need to itemize your deductions to claim the tax benefit. That means, to reduce your tax bill, your charitable contributions plus other itemized deductions (such as mortgage interest or medical expenses over a certain limit) must exceed your standard deduction for the year. Otherwise, it makes more sense to claim the standard deduction.
However, ever since the TCJA almost doubled the standard deduction and limited other deductions, far fewer taxpayers itemize, because it’s much harder for any taxpayer’s total itemized deductions to exceed the standard deduction. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married filing joint filers. An additional standard deduction is available for those 65 and older and blind taxpayers.
If itemizing makes sense for you, then consider gifting appreciated assets, such as stocks, bonds, or real estate, to make the most of your charitable deductions. By gifting appreciated assets, you avoid paying capital gains tax and capture an immediate income tax deduction based on the asset’s value at the time of the gift.
But remember to also consider other assets when giving. Bullet advises taxpayers to donate items such as furniture, clothing and even vehicles to their favorite charity to increase their itemized deductions before year-end.
If you or a loved one will incur educational expenses for K-12 or college, consider funding a 529 plan before year-end.
While there isn’t a federal income tax deduction for 529 plan contributions, your money grows tax-deferred, and withdrawals are tax-free if used for qualified educational expenses, such as tuition, room and board, books and supplies. And while there isn’t a federal income tax deduction, you may qualify for a state tax deduction for 529 plan contributions.
Before funding a 529 plan, determine how much you should contribute to the account. If you fail to use funds for qualified educational expenses, you may face taxes on investment earnings, plus a penalty for a nonqualified withdrawal.
Bullet says that, thanks to the Secure Act 2.0, 529 plans now offer more flexibility. Starting this year, unused 529 funds can be rolled to a Roth IRA for the beneficiary if specific requirements are met, such as the funds being held in the 529 for at least five years and the 529 account being open for at least 15 years. The maximum lifetime rollover amount from a 529 plan to a Roth IRA is $35,000.
There’s still time to make money moves now that help keep more money in your pocket at tax time. And after you’re done making strategic tax decisions this year, don’t forget to keep a close eye on tax news in 2025. The 2017 Tax Cuts and Jobs Act (TCJA), a massive overhaul of the tax code, is set to expire at the end of 2025.
While experts say President-elect Donald Trump and the United States Congress will likely extend key policies of the TCJA, it’s unclear exactly what will happen. Conzo recommends watching to see whether crucial tax policies under the TCJA are extended, or not. That way, you can continue to strategize ways to save money in 2025 and beyond.
