End-of-the-Year Tax Reduction Strategies: How to Keep More of What You Earn

As the year draws to a close, now is the perfect time to focus on tax planning. By taking proactive steps before December 31st, you can potentially reduce your tax liability and set yourself up for greater financial success in the coming year. Whether you’re a business owner, investor, or simply looking to maximize your personal finances, there are several key strategies to consider before year-end.

?Here’s a breakdown of some effective end-of-the-year tax reduction strategies that can help you keep more of what you’ve earned.

1. Maximize Retirement Contributions

One of the most straightforward ways to lower your taxable income is by contributing to tax-advantaged retirement accounts. Here are a few options to consider:

????? 401(k), 403(b), or 457 Plans: Contributions to these employer-sponsored retirement plans are tax- deferred, meaning the money you contribute reduces your taxable income for the year. For 2024, you can contribute up to $23,000, or $30,000 if you’re over 50 and eligible for catch-up contributions.

????? Traditional IRA: Contributions to a traditional IRA may be tax-deductible, depending on your income level and participation in employer-sponsored retirement plans. For 2024, the contribution limit is $7,000, or $8,000 for those 50 and older.

?Maximizing your retirement contributions before the year ends is an effective way to build wealth while reducing your taxable income.

?2. Leverage Tax Loss Harvesting

If you have investments in taxable accounts, now is a good time to review your portfolio for potential tax loss harvesting opportunities. Tax loss harvesting involves selling investments that have declined in value to offset gains in other areas of your portfolio, reducing your overall tax burden.?

Any capital losses you realize can first offset capital gains. If your losses exceed your gains, you can use up to

$3,000 of losses to offset ordinary income, with any additional losses carried forward to future years. By strategically harvesting losses, you can focus on reducing your taxable income and rebalance your portfolio without altering your long-term investment strategy.

3. Consider Charitable Contributions

Donating to qualified charitable organizations not only supports causes you care about, but it can also provide a meaningful tax deduction. Here are a few ways to make your charitable giving more tax-efficient:

????? Cash Donations: You can deduct up to 60% of your adjusted gross income (AGI) for cash donations to qualified charities. Make sure to keep documentation, such as receipts or written acknowledgments from the charity, for any donation over $250.

????? Donating Appreciated Assets: If you have stocks or other investments that have appreciated, consider donating them directly to a charity. You won’t have to pay capital gains taxes on the appreciated value, and you can deduct the fair market value of the asset at the time of donation.

4. Accelerate Deductions and Defer Income

If you're expecting a higher tax bracket next year or simply want to lower this year’s tax bill, consider accelerating deductions and deferring income.

?????? Accelerating Deductions: Make additional payments before year-end for state and local taxes, medical expenses, or mortgage interest if you plan to itemize deductions. This can increase your deductions for the current year.

????? Deferring Income: If you’re self-employed or a small business owner, consider deferring any potential income until after December 31st. This can push that income into the next tax year, lowering your taxable income for the current year.

5. Make Use of the Annual Gift Exclusion

The IRS allows you to gift up to $17,000 per person per year without triggering gift taxes. If you’re in a position to transfer wealth, now is a good time to take advantage of the annual gift tax exclusion. This strategy can help you reduce the size of your estate while passing along wealth to family members or loved ones in a tax-efficient way.

If you're considering more significant gifts, remember that you and your spouse can "gift split," meaning together you can give up to $34,000 to an individual without tax consequences.

?6. Review and Fund Your HSA

If you have a Health Savings Account (HSA), it’s another great way to lower your taxable income. Contributions to an HSA are tax-deductible, and the money grows tax-free as long as it’s used for qualified medical expenses. For 2024, the HSA contribution limits are $4,150 for individuals and $8,300 for families. If you’re 55 or older, you can contribute an extra $1,000.

?Funding your HSA before the end of the year is a tax-smart move and provides a valuable resource for covering future healthcare expenses.

?7. Take Advantage of the Qualified Business Income Deduction (QBI)

If you’re a small business owner or self-employed, the Qualified Business Income (QBI) deduction allows you to potentially deduct up to 20% of your qualified business income. This deduction applies to sole proprietorships, partnerships, S corporations, and some LLCs.

Be sure to review your income and deductions with a tax advisor to ensure you're maximizing this benefit. It’s a powerful way to reduce your overall tax burden, but it comes with specific rules and income limits, so professional guidance is key.

?8. Review Your RMDs (Required Minimum Distributions)

If you're over 73, you are required to take Required Minimum Distributions (RMDs) from your traditional IRA or 401(k) accounts. Failing to take the required amount can lead to steep penalties—up to 50% of the amount not withdrawn.

If you don’t need the income from RMDs, consider using a Qualified Charitable Distribution (QCD) to donate directly to a charity. A QCD allows you to donate up to $100,000 per year tax-free, which counts toward your RMD while reducing your taxable income.

Final Thoughts

Year-end tax planning is a critical component of financial success. By taking advantage of these strategies, you can potentially lower your tax liability, boost your retirement savings, and preserve more wealth for future growth. However, each individual’s tax situation is unique, so it’s important to work closely with a financial advisor or tax professional to tailor these strategies to your specific needs.

If you’d like to discuss how these tax-saving strategies can fit into your overall financial plan, feel free to reach out. Together, we can craft a customized approach that aims to help you minimize taxes and maximize your financial potential.

?Let’s connect and ensure you’re taking the right steps before the year ends!

?Disclosures

The information provided in this article is educational in nature and is not intended to be a recommendation for any specific investment product, strategy, plan feature, or other purposes. Accordingly, it should not be construed as personalized business, legal, financial, investment or tax advice for compensation.