As the year winds down, many people start thinking about the upcoming tax season. September and early autumn present an excellent opportunity to take proactive steps to ensure your tax situation is in good shape. By acting now, you can maximize your tax savings, avoid last-minute scrambles, and potentially reduce your overall tax liability. Here are seven practical year-end tax tips that you can implement now.
September is a great time to review your retirement contributions to make sure you’re on track to maximize your contributions for the year. Contributions to retirement accounts like 401(k)s, 403 (b)s, IRAs, and SEP-IRAs are often tax-deductible, reducing your taxable income.
For 2024, the contribution limit for 403(b) and 401(k) plans is $23,000, with an additional catch-up contribution of $7,500 for people aged 50 and older. For traditional and Roth IRAs, the limit is $7,000, with a $1,000 catch-up contribution for those 50 and older. If you haven’t maxed out your contributions yet, consider increasing them in the final months of the year.
Charitable giving is a great way to reduce your taxable income while supporting causes that are important to you. If you itemize deductions, consider making charitable contributions before the end of the year.
In September, start planning your charitable donations. If you’re considering making a large donation, you might want to break it up into smaller contributions to different charities so you can boost your impact. Additionally, if you have appreciated stock, you can donate it to a charity, avoid capital gains tax, and receive a deduction for the fair market value of the stock.
Another potentially effective strategy is to contribute to a Donor-Advised Fund (DAF). A DAF allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charities over time. This can be particularly useful if you want to make a large charitable donation in a high-income year but spread out the actual donations to charities over several years.
With the increase in the standard deduction, fewer taxpayers are itemizing their deductions. However, if your itemized deductions are close to the standard deduction amount, you may benefit from "bunching" your deductions.
This strategy involves accelerating deductible expenses into the current year to surpass the standard deduction threshold. For example, you might make an extra mortgage payment, pay property taxes early, or increase charitable donations in September and early autumn to bunch these deductions into the current year.
If you have a high-deductible health plan (HDHP), you can contribute to a Health Savings Account (HSA). HSAs offer a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
The contribution limit for 2024 is $4,150 for individual coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution for people aged 55 and older. Review your HSA contributions in September to ensure you're on track to max out your contributions by year-end.
With the Tax Cuts and Jobs Act (TCJA) set to expire after 2025, tax rates are expected to increase for many individuals. This makes September and early autumn an ideal time to consider a Roth conversion as part of your tax planning strategy. A Roth conversion involves transferring funds from a traditional IRA or 401(k) to a Roth IRA. While the conversion is taxable, future withdrawals from the Roth IRA are tax-free, provided certain conditions are met.
By converting in 2024 or 2025, you may be able to take advantage of the current lower tax rates before they potentially rise. This strategy is particularly beneficial if you expect to be in a higher tax bracket in retirement or if you want to minimize the tax impact on your heirs. Keep in mind that a Roth conversion can push you into a higher tax bracket in the year of the conversion, so it's important to calculate the potential tax impact carefully and possibly spread conversions over multiple years.
Many employers offer benefits that can reduce your taxable income, such as flexible spending accounts (FSAs), dependent care accounts, and commuter benefits. These accounts allow you to set aside pre-tax dollars for specific expenses.
September is an ideal time to review your benefits and ensure that you’re making the most of them. If you have an FSA, check your balance and make sure you use the funds before the year ends, as they are often "use-it-or-lose-it."
Tax laws can change from year to year, and staying informed is key to maximizing your tax savings. In September, review any changes to tax laws that could impact you. For example, changes in tax brackets, credits, or deductions could affect your tax liability.
Consider consulting with a tax professional who can help you navigate any new tax laws and develop a strategy to minimize your tax burden.
Conclusion
Taking action in September and early autumn can help you prepare for tax season and potentially reduce your tax liability. Start planning now, and you'll thank yourself when tax season rolls around.
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