The end of the year is a crucial time to review your finances and make strategic moves to reduce your tax burden and boost your refund for the upcoming tax season. Here are some key steps to consider:
First, review your paycheck and adjust your tax withholding if necessary. The US operates on a “pay as you go” income tax model, so ensuring you’re not overpaying or underpaying in taxes is important.
Submit an updated W-4 form to your employer if changes are needed. Next, consider selling losing stocks to offset capital gains from profitable investments. This strategy, known as tax-loss harvesting, can minimize your capital gain taxes.
For example, if you made $25,000 from a real estate sale but had $25,000 in stock losses, the net effect on your taxable income would be zero. Maximizing contributions to retirement accounts like 401(k)s and IRAs is another excellent way to reduce your tax bill. For 2024, the maximum 401(k) contribution is $23,000, including employer contributions.
If you’re over 50, you can contribute an extra $7,500. For IRAs, the maximum deductible contribution is $7,000, or $8,000 if you’re over 50. Recent legislation has also introduced substantial tax credits for making your home more energy efficient.
Installing solar panels, geothermal heat pumps, and other green technologies can earn you a 30% tax credit on the cost.
Year-end tips for tax savings
Make sure any installations are completed before Jan.
1, 2025. If you’re expecting an end-of-year bonus, consider asking your employer to defer it to January to reduce your 2024 taxable income. Freelancers can also delay invoicing until December to receive payments in January, postponing the income tax on that money.
Charitable donations made before the end of the year can be deducted from your taxable income if you itemize deductions. Verify that donations are to IRS-recognized charities. Taxpayers can generally deduct donations up to 50% of their taxable income.
For those 73 and older, remember to take required minimum distributions (RMDs) from retirement accounts like 401(k) plans and traditional IRAs. Failing to withdraw the correct amount can result in hefty penalties. Lastly, if you have significant medical expenses, consider grouping them within the same year to maximize deductions.
Only medical expenses exceeding 7.5% of your Adjusted Gross Income (AGI) are deductible. By implementing these tax strategies before the end of 2024, you can significantly reduce your tax liability and boost your refund for the 2025 tax season. Effective planning now can lead to substantial financial benefits next year.
