10 Tax Reduction Strategies to Consider Before the End of 2024
"Tax season" is year-round at Keen Wealth. As we meet with folks throughout the year and help them respond to life's ups and downs, we're constantly reevaluating their portfolios, budgets, and goals to look for more efficient and advantageous tax planning strategies.
However, there are certain tax moves that you have to lock in by December 31st in order to apply them to your tax filings the following April. As we head into the fourth quarter of 2024, be sure to talk to your financial advisor and your tax professional about these 10 topics.
1. Harvest Tax Losses
Selling investments that have declined in value can help offset your capital gains from other investments, which can reduce your overall tax liability. Plus, if your losses exceed your gains, you can write off up to $3,000 of excess losses.
Some folks also use tax-loss harvesting to rebalance their portfolios by buying other securities. Be aware that according to the IRS’ wash-sale rule, if you repurchase the same security, or one that is nearly identical, within 30 days of your sale, you can't claim the tax-loss credit.
2. Maximize Retirement Contributions
For 2024, the maximum contribution to a 401(k) is $23,000 if you're under 50. Folks 50 and older can add an additional catch-up contribution of $7,500. These contributions can reduce your taxable income for the year if you make them by December 31st.
The IRS allows 2024 contributions into traditional and Roth IRAs until April 15, 2025. These contributions have some tax benefits and if you’re thinking about maxing your retirement accounts, you might want to make a plan to hit that $7,000 ceiling ($8,000 if you're 50 or older) as well.
3. Make Charitable Donations
Most charitable donations aren't tax deductible unless you're still making itemized tax deductions (as opposed to taking the larger standard deduction). If you do itemize, you need to keep a record of your donations to qualified 501(c)(3) organizations. Depending on the type of donation, you might be able to deduct 20-60% of your adjusted gross income.
If you want to make a more sustainable impact on a cause that's dear to you, talk to your advisor about establishing a donor-advised fund (DAF) or a family trust, which can provide some tax advantages that will benefit you personally as well as your long-term giving goals.
4. Convert Retirement Funds into a Roth IRA
If you anticipate being in a lower tax bracket in 2024 than you usually are, your advisor might want to discuss converting a part of your traditional IRA or 401(k) into a Roth IRA. You'll pay taxes on the converted amount now while you're in that lower bracket, and future growth inside the Roth and subsequent withdrawals will be tax-free.
5. Defer Additional Income
Does your employer allow you to defer bonuses or other year-end benefits that impact your taxable income? Talk to your advisor before you cash that check. Self-employed individuals might also consider delaying some of their year-end billing until January if they've had an especially good year.
6. Review Required Minimum Distributions (RMDs)
If you're 73 or older, the IRS requires you to take a required minimum distribution (RMD) from your traditional retirement accounts by the end of each year. If you have several accounts, you're allowed to take your total RMD from multiple accounts or from just one. But if you don't meet your RMD requirements by December 31st, the IRS will fine you 50% of what you should have withdrawn.
RMDs are considered taxable income. But if you don't need that money to pay bills, you can make qualified charitable distributions (QCDs) from your retirement accounts directly to a charity, which can satisfy your required minimum distributions without affecting your tax liability.
7. Use Tax-Advantaged Accounts for Healthcare
Folks who are planning ahead for potential medical issues as they age or paying too much out of pocket to fill gaps in their high-deductible health insurance might consider opening a Health Savings Account (HSA). Qualified individuals can make tax-deductible contributions of up to $4,150 for individual coverage or $8,300 for family coverage in 2024, and folks 55 and older can contribute an additional $1,000. Funds inside an HSA grow tax free and can be used to pay for qualified health care expenses without counting as taxable income.
8. Utilize the Gift Tax Exclusion
The 2024 gift tax exclusion allows you to give up to $18,000 to an individual without incurring any tax penalties for you or the recipient. A married couple could, potentially, give up to $36,000 to the same person. Folks who want to transfer their wealth to loved ones might consider using the gift tax exclusion as part of their long-term planning to reduce the eventual value of their estate, which could potentially lower estate taxes for your heirs.
9. Fund a 529 Plan for Your Child or Grandchild
A 529 plan can be used to pay for certain educational expenses, including tuition. The money contributed to a 529 plan grows tax-free, and withdrawals used to pay for qualified expenses are tax-free as well. Although contributions to a 529 plan are not federally tax-deductible, many states offer deductions or credits for contributions made to a 529 plan. And recent changes to 529s allow for some flexibility around how funds can be used if a child doesn't attend college.
10. Invest in Energy-Efficient Home Upgrades
Whether you own or rent, green home upgrades may be eligible for a residential clean energy credit or energy efficient home improvement credit worth up to 30% of the improvement cost, including labor. Qualified expenses include solar panels and water heaters, energy-efficient doors, windows, and skylights, and professional home energy audits. Not only will these upgrades lower your taxes, they could also lower your energy bills throughout the year.
Of course, none of these strategies exists in a vacuum. And neither do your taxes.
Before you hit the holiday rush, schedule your year-end financial review and see how Keen Wealth’s comprehensive planning process can keep every part of your financial plan working together towards your goals.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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