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Fast forward a couple of months to when the Holiday season is ending, and we are all excited about the new year's prospects. Suddenly, there is that feeling of dread because you realize that tax season is only a few weeks away, and you must start collecting forms and information to prepare your taxes by the April deadline. Let’s be honest: tax preparation is not fun. It feels like a burdensome task we all want to complete and move on. For many, it is about collecting all the necessary information and forms and getting them to their tax professional to prepare their returns. The only question most people have is whether they owe money or if they will be getting a refund. Others go through the painstaking process of filing their taxes on their own using tax preparation software even though they have limited experience as tax preparers. Tax preparation is a revisionist process because you are simply looking back and reporting on the prior year’s financial activity. The ability to affect your tax liabilities is limited at this point. It is just not any fun and could be costly. In contrast, tax planning is forward-looking, with a proactive focus on making informed decisions that can directly affect your current and future taxes. It can even be fun when you understand how your choices or actions can save you money on your taxes. At a minimum, a little tax planning can go a long way to making the tax preparation process much less burdensome. So, as we approach the end of the year, it is a wonderful time to focus on tax planning strategies that can help you minimize your tax liability and maximize your savings. With just a few months left in the year, taking proactive steps can make a significant difference when tax season rolls around. While this is not meant to be tax advice (you should speak with a tax professional), here are a few ideas to consider as you wrap up the year:
If you have not maxed out your contributions to retirement accounts like a 401(k) or an IRA, now could be a good time to increase contributions over the last few months of the year. For 2024, you can contribute up to $23,000 to a 401(k). With catch-up contributions for those 50 or older, the limit is $30,500. For IRAs, you can contribute up to $7,000 or $8,000 if you are 50 and over. If you have built up savings, you can maximize your contributions for the last few pay periods of the year and simply replace the reduced net income with savings to meet your monthly budget requirements. This basically shifts some of your savings into retirement. Just make sure you maintain an appropriate emergency reserve. It also requires planning with your payroll department to make sure any changes you make are effective when you expect them to be. 3. Plan for Health Care Expenses If you have a Health Savings Account (HSA), you can use a similar strategy to shift savings to your HSA each year. Contributions to an HSA are tax-deductible, grow tax-deferred, and tax-free when withdrawn for qualified medical expenses. For 2024, individuals can contribute up to $4,150, and families can contribute up to $8,300. Individuals 55 and older can also make an additional $1,000 catch-up contribution. Another alternative is to allow your HSA to grow by paying medical expenses out of pocket. While this can be a strain on the budget, avoiding distributions for qualified medical expenses today can make the HSA a valuable addition to your retirement savings plan in the future, given the triple tax advantage you get from the tax deduction, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. 4. Consider Tax-Loss Harvesting or Realizing Long-term Gains If you have investments that have lost value, consider selling them to realize the loss. This strategy, known as tax-loss harvesting, allows you to offset capital gains with your losses, reducing your overall taxable income. Just be mindful of the wash-sale rule, which disallows a loss deduction if you repurchase the same security within 30 days. Even if you do not have any losses to offset long-term capital gains, you may want to sell appreciated assets to take advantage of current capital gain rates. Depending on your filing status and taxable income, long-term capital gain rates can be as little as 0%, 15%, or as high as 20%. Most individuals would be taxed at the 15% tax rate for long-term capital gains. If you believe taxes will increase in future years, taking advantage of current long-term capital gain rates could be beneficial. You may also want to consider selling an asset over multiple years to ease the tax burden each year. Remember, long-term capital gains rates apply to assets held for over 1-year. Short-term capital gains are taxed as ordinary income. 5. Make Charitable Contributions Donating to qualified charities can provide a double benefit: you help those in need and may receive a tax deduction. If you plan to make charitable contributions, consider doing so before the end of the year. If you have appreciated assets, such as stocks, donating those instead of cash can help you avoid capital gains taxes while receiving a deduction for the fair market value. As the year ends, taking proactive steps in your tax planning can lead to significant savings. By reviewing your income, maximizing contributions, considering charitable donations, and consulting with a tax professional, you can set yourself up for a successful tax season. Do not wait until it is too late—start planning to make the most of your tax situation.
PROFESSIONAL DESIGNATION:
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks. Those certification requirements include education, exam, experience and ethics components--more information is available at Professional Designations. DISCLOSURE: Information presented is for informational purposes only. StraightLine Group, LLC (“StraightLine”) is a registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Past performance is not indicative of future results. Investing involves risk, including the possibility of loss of principal. The ideas and opinions expressed herein do not constitute legal, tax, or investment advice or a recommendation of any particular security or strategy. Before making any investment decision, you should seek expert, professional advice and obtain information regarding the legal, fiscal, regulatory and foreign currency requirements for any investment according to the laws of your home country and place of residence. Any forward-looking statements or forecasts are based on assumptions and actual results may vary. Information presented from third parties is believed to be reliable, but no warranty is provided. StraightLine is not required to update information presented, unless otherwise required by applicable law. For more information about StraightLine, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov/firm/summary/127401 or contact us at 248-269-8366. Comments are closed.
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