As the year draws to a close, it’s an essential time to assess your financial situation and take purposeful actions to lessen your tax obligations and enhance your potential refund for the approaching tax year. Here are several important strategies to keep in mind:
To begin with, examine your paycheck and modify your tax withholding if needed. The United States follows a “pay as you go” income tax system, hence it’s crucial to ensure you’re neither overpaying nor underpaying on taxes.
If adjustments are necessary, submit a revised W-4 form to your employer. Additionally, consider liquidating underperforming stocks to balance out capital gains from successful investments. This approach, known as tax-loss harvesting, can help reduce your capital gains tax.
For instance, if you realized $25,000 from a property sale but incurred $25,000 in stock losses, your taxable income would effectively be neutral. Increasing contributions to retirement plans like 401(k)s and IRAs is another highly effective method to lower your tax obligations. In 2024, the maximum allowable contribution for a 401(k) is $23,000, inclusive of employer contributions.
If you are 50 years old or older, you are entitled to contribute an additional $7,500. For IRAs, the maximum deductible contribution stands at $7,000, or $8,000 if you exceed age 50. Recent laws have also introduced significant tax incentives for enhancing the energy efficiency of your home.
Installing renewable energy systems such as solar panels or geothermal heat pumps may qualify you for a 30% tax credit on your expenditures.
End-of-Year Advice for Tax Savings
Ensure that installations are finalized before January 1, 2025. If you anticipate receiving a year-end bonus, consider requesting your employer to postpone it until January, reducing your taxable income for 2024. Freelancers can similarly hold off on invoicing until December to receive payments in January, which delays the tax implications on that income.
Charitable contributions made before the year concludes can be deducted from your taxable income, provided you itemize your deductions. Ensure your donations go to IRS-approved charities. Most taxpayers can typically deduct contributions up to 50% of their taxable income.
If you are aged 73 or older, don’t forget to make your required minimum distributions (RMDs) from retirement accounts like traditional IRAs and 401(k) plans. Neglecting to withdraw the necessary amount might lead to substantial penalties. Lastly, if you have considerable medical expenses, think about consolidating them into a single tax year to maximize your deductions.
You can only deduct medical costs that exceed 7.5% of your Adjusted Gross Income (AGI). By applying these tax strategies before the conclusion of 2024, you can significantly decrease your tax burden and enhance your refund for the 2025 tax year. Thoughtful planning now can result in meaningful financial advantages in the forthcoming year.
