Tax planning can seem complicated, but getting started in the fall can help prepare you for next year’s taxes and ensure you come out ahead financially.
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“The end of the year is the perfect time to ensure your plans are in order and to optimize your financial and tax positions,” said Nicolette Davicino, a certified financial planner (CFP), enrolled agent and senior paraplanner at Armstrong, Fleming & Moore, Inc.
“Whether you’re an individual, business owner or high-net-worth individual, careful planning and consideration of your financial situation can lead to a more secure financial future.”
According to our experts, these are some of the best year-end tax planning tips that lead to better financial outcomes.
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Review Your Income and Deductions
Davicino recommended starting with your income and possible deductions.
“Examine your income sources, including salary, investments, and rental income,” she said. “Ensure you’ve maximized deductions such as mortgage interest, student loan interest and state and local taxes.”
Use Those Retirement Accounts
“Consider contributing to retirement accounts like 401(k)s, IRAs or HSAs. These contributions can reduce taxable income and increase your long-term savings,” said Davicino.
Speaking of retirement accounts, Davicino also suggested checking your required minimum distributions (RMDs). If you’re over the age of 72, you’ll need to be taking these to avoid penalties.
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Prioritize Health Savings
You’re never too young to prioritize your health. The sooner you start setting aside money for healthcare — beyond your normal insurance — the better off you’ll be in the long term (and for next year’s tax season).
“Consider enrolling in or adjusting contributions to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) to manage healthcare expenses efficiently,” advised Davicino.
The HSA contribution limits for 2024 are $4,150 for self-only coverage and $8,300 for family coverage. Those 55 and older can contribute an additional $1,000. The annual contribution limit in 2024 for FSAs was increased to $3,200.
Harvest Any Tax Losses
Investment losses are never fun, but you can use them to your advantage, too.
“If you have investments with losses, consider selling them to offset gains and potentially reduce your tax liability,” said Davicino. “The IRS allows investors to deduct up to $3,000 in capital losses per year against ordinary income. Remaining losses may be carried forward to offset gains in future years.”
Do Some Charitable Giving
Did you know that charitable contributions are tax deductible up to a certain amount?
“Make year-end charitable contributions to eligible organizations and keep records for deductions,” said Davicino.
Even if you don’t itemize, you could still deduct your charitable contributions — up to $300 for individuals and $600 for married couples.
Start Setting Aside Money (or Keep Doing It)
Ideally, you’ll be setting aside money for taxes each month — or your employer will do it for you. But if you haven’t been, it’s not too late to start.
“The most immediate plan of action for tax planning, especially if you have a steady income, is putting money aside monthly in a savings account or escrow account so you know you will have enough money to pay what you owe in taxes at the end of the year,” said Eliza Gwendalyn Mova, the founder at Book Media Inc.
“Instead of waiting until tax season to pay a large sum, you can set aside money each month or quarter specifically for your tax bill. For example, if you estimate that you’ll owe $3,600 in taxes, you could put aside $300 per month or $900 per quarter,” she continued. “By doing this, when it comes time to file your taxes, you already have the funds set aside, making the payment less overwhelming.”
This strategy can help you avoid stress while reducing the risk of underpayment penalties from the IRS.
Predict Future Cash Flow
This one’s particularly important if you work for yourself or run a business.
“Not planning cash flow for tax payments is a big mistake I see each year,” said Ben Richmond, the managing director of Xero (North America). “Start working with your accountant now to project cash flow and tuck away savings each month in case you need to pay during tax season.”
According to Richmond, it’s also important to do proper forecasting and budgeting for your business, as it will allow you to identify potential tax liabilities and make plans to optimize your positioning.
Use Your Annual Gift Tax Exclusion
If you’re in a position to do so, you could benefit from using your yearly gift tax exclusion before 2025.
“Each taxpayer is eligible to give up to $18,000 annually, or $36,000 if married, without filing a gift tax return or utilizing your lifetime estate and gift tax exemption,” said Brian Tullio, a CFP and wealth manager at Fairway Wealth Management LLC.
“You either use or lose your annual exclusion, so it’s important to take advantage of the exclusion amount each year.”
Fortunately, you can do this in several ways, one of which is to gift appreciated securities.
“The donor won’t have to pay tax on the future sale of those securities, and if the donee is in a low-income tax bracket (i.e., children of the donor), they may be able to sell the positions with little to no capital gains tax,” Tullio added.
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This article originally appeared on GOBankingRates.com: 8 Smart Year-End Tax Planning Tips for Better Financial Outcomes
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