Year-End Tax Planning Tips: Maximize Deductions Before December 31st - PART I

As we enter the final quarter of the year, it’s the perfect time to focus on year-end tax planning. By taking a few proactive steps now, you can reduce your tax liability and make the upcoming tax season much easier. Here are some key strategies to consider as you approach December 31st:

1. Maximize Retirement Contributions

One of the easiest ways to lower your taxable income is by contributing to tax-deferred retirement accounts, such as a 401(k) or traditional IRA. For 2024, the 401(k) contribution limit is $23,000 (plus an additional $7,500 if you’re over 50). Contributions to these accounts are tax-deductible and grow tax-free until retirement. If you haven’t maxed out your contributions yet, now’s the time to do so.

2. Harvest Capital Losses

If you’ve experienced investment losses this year, you can use those losses to offset gains. This is called “tax-loss harvesting.” You can use up to $3,000 of capital losses to offset ordinary income, and any excess losses can be carried forward to future tax years. It’s a smart way to reduce your taxable income and minimize the impact of a tough year in the markets.

3. Donate to Charity

Charitable donations are a great way to give back and receive a tax deduction. Be sure to donate to qualified 501(c)(3) organizations, and keep receipts for your records. If you’re donating items instead of cash, make sure to get a written appraisal for large contributions. Also, consider “bunching” charitable contributions—donating two or more years’ worth in one year—to maximize the tax benefits if you don’t itemize annually.

4. Review Your Tax Withholding

If you’ve had a significant change in income this year, such as a promotion or additional freelance work, you may need to adjust your tax withholding. Reviewing your withholding now can prevent a large tax bill or refund at the end of the year. Use the IRS withholding calculator to ensure you’re on track.

5. Defer Income and Accelerate Deductions

If you’re self-employed or a business owner, consider deferring income to next year if possible. For example, wait until January to send invoices or finalize deals. On the flip side, try to accelerate deductible expenses, such as making business purchases or paying for professional services, before year-end to reduce your taxable income for this year.