There are a number of different tax planning moves you can make before December 31 to reduce your owed taxes. But how can you know which ones are available to you? Here are five year-end tax planning questions you may want to ask your financial professional soon.
#1: Is there room left in my retirement accounts?
For the 2024 tax year, most taxpayers who have earned income can contribute up to $23,000 to a 401(k), $23,500 in 2025, and $7,000 to a traditional or Roth IRA. Depending on your tax bracket and taxable income, contributing money to a pre-tax account like a 401(k) or traditional IRA could save you a significant amount in taxes. If you haven't already maxed out your contributions to one or both of these accounts, doing so could pay off at tax time.
Each time you contribute to your 401(k) using pre-tax dollars from your paycheck, your taxable income decreases for the current year.
#2: Should I sell investments?
If you have some stagnant or "loser" investments, you may be able to sell them at a loss in order to offset investment gains. This strategy, known as "tax loss harvesting," can allow you to free up funds for more lucrative investments while minimizing your capital gains taxes.
But because the rules around buying and selling taxable securities can be complicated, this is a strategy you'll definitely want to discuss with your financial professional before finalizing any transactions.
#3: Are any other tax deductions available?
Some last-minute tax deductions may work to lower your bill. Talk to your tax professional about whether these deductions may be available:
- Charitable contributions
- Medical expenses
- Student loan interest (depending on your income level)
- Gambling losses (up to your gambling income amount)
- Home office expenses
#4: Can I defer any income?
Another way to reduce your taxes is to defer some income into the next year. Though you may not be able to do this with a traditional W2 paycheck, deferring contract or freelance income, a bonus, or capital gains into next January instead of December will mean that this income is taxed on next year’s taxes, not this past year’s.
However, deferring income may only make sense if you expect to be in the same tax bracket (or a lower one) next year. You don't want to defer income that will launch you into a higher bracket. Talk to your financial professional to see whether it makes sense to defer any income and, if so, how to make it happen.
#5: Do I need to spend FSA funds?
Unlike a health savings account (HSA), which allows you to carry over funds from year to year, a flexible spending account (FSA) is generally "use it or lose it." If you've contributed to an FSA for 2024, it's a good time to take stock of how much is left and what you can spend it on. Also, be on the lookout for any grace periods—you might find that you have until March 15, 2025, instead of December 2024 to spend certain FSA funds, and until March 31, 2025, to file a claim.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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Footnotes
Understanding the year-end spending rules for your health account (bankofamerica.com)
401(k) contribution limits 2023, 2024, and 2025 | Fidelity
Retirement topics - IRA contribution limits | Internal Revenue Service (irs.gov)