Being proactive about your taxes isn’t just about avoiding penalties; it’s crucial to building and preserving your wealth.
Why End-of-Year Tax Planning Matters
- Minimize your taxable income.
- Take advantage of deductions and credits.
- Maximize contributions to tax-advantaged accounts.
- Position yourself to build wealth more efficiently in the coming year.
Let’s look at specific actions you can take as we move into the fourth quarter.
Calculate Your Estimated Tax Liability
One of the most important things you can do is calculate your estimated tax liability for the year to avoid surprises. Calculating your tax liability gives you a clear picture of where you stand and lets you adjust your strategy before it’s too late.
- Action: Sit down with your tax advisor, review your books, and estimate your tax liability. For those with more complex situations—this is the time to fine-tune your tax strategy for the remainder of the year.
Harvest Capital Losses
Tax-loss harvesting can help offset capital gains and reduce overall taxable income. This strategy involves selling underperforming investments to realize losses, which can be used to offset taxable gains or reduce income.
- Action: Consider selling investments in a loss position to offset gains. Remember, the wash-sale rule means you can’t buy back the same or substantially identical asset for 31 days, so plan accordingly.
Review and Adjust Your Payroll
If you're running a business, review your payroll tax reports. Payroll taxes are no joke; missing a payment can lead to massive penalties and even legal trouble. Make sure everything is up to date and accurate.
- Action: Ensure your payroll tax reports are done quarterly, and if you hire a service, double-check their work. Meet with your tax advisor to ensure all payments are accurate and timely.
Maximize Retirement Contributions
Before the year ends, it’s time to max out those retirement contributions. This is one of the easiest ways to reduce taxable income while building wealth.
- Action: Review your retirement savings plan and maximize contributions before December 31st.
401(k): Contribute up to $22,500 for the year, or $30,000 if you’re over 50.
IRA/Roth IRA: Contribute up to $6,500 or $7,500 for those over 50.
Defer Income and Accelerate Deductions
If you expect to be in a lower tax bracket next year, you may want to defer income to 2025. This could include delaying year-end bonuses or waiting to sell investments. Conversely, consider accelerating deductions such as medical expenses or state taxes to reduce this year's taxable income.
- Action: Review your income and deductions and discuss with your financial advisor the possibility of shifting income or expenses to better align with your tax strategy.
Timing Your State and Property Tax Payments
Here's where timing can make a huge difference. Depending on your overall income, you may want to prepay state and property taxes in December or delay them into January to optimize your deductions. With limitations like the SALT cap on state and local tax deductions, this can be an important move in your strategy.
- Action: Review your state and local tax situation with your advisor to determine whether prepaying or delaying tax payments could save money.
Charitable Contributions
Charitable contributions made before December 31st are deductible on your 2024 tax return. If you’re itemizing deductions, donations to qualified charities can reduce your taxable income, especially if you bunch your donations to maximize your tax benefit.
- Action: Consider donating cash or appreciated assets like stocks to qualified charities. This can provide a tax deduction and avoid capital gains taxes on appreciated assets.
The fourth quarter is crunch time for tax planning, but don’t worry—you’ve got plenty of options to take control. The goal here is to avoid surprises and ensure you’re making the most of every opportunity to reduce your taxes and grow your wealth.
As always, tax planning works best when you’ve got a great team around you. Want help finding the team that’s right for you? Book a call with TFW Advisors® today!