Review Your Tax Situation Before Year-End

Summer’s scorching temperatures are finally cooling, and the fall season is upon us. While, for some, this means pumpkin spice lattes and sweaters, for tax planners, this means it’s time for year-end tax planning. With just a few months left in 2024, most taxpayers have a good idea of where their income will end up for the year. Based on this information, it is time to review your tax situation and take action before the year-end deadline.

Income Planning

The Tax Cuts and Jobs Act of 2017 reduced income tax rates for individuals through 2025. With these historically low tax rates in effect, consider accelerating income if you find yourself in a lower bracket. This may mean exercising stock options or converting funds from an IRA to a Roth IRA. Or, if your income is higher than normal this year, consider deferring income (such as bonuses) into the next tax year.

If you are enrolled in Medicare or are within two years of receiving benefits, review your modified adjusted gross income (MAGI) to see how your income will impact future Medicare premiums. Medicare has a two-year lookback to determine premiums, so your 2024 income will impact your 2026 premiums. Consider accelerating or deferring income to stay within certain Medicare premium tiers.

Withholding

Now that you have a good handle on your income for the year, review whether your federal and state income tax withholding is appropriate. To avoid federal underpayment penalties, you would need to pay in 100% of last year’s tax (110% if adjusted gross income is higher than $150,000 for married couples, and $75,000 for single filers) or 90% of this year’s tax, whichever is lower.

Consider increasing withholding to cover any shortfall or adjust your fourth quarter estimated payment. Don’t forget to double-check your state withholding, since state underpayment penalties are generally higher than their federal counterpart. Use this IRS withholding calculator to see if your withholding will cover your federal tax obligation.

Deduction Planning

If you know you will be in a high tax bracket for the year, or if you will have a withholding shortfall, consider increasing your tax deductions. Consider maximizing the contributions to your 401(k) plan by year end. In 2024, the 401(k) contribution limit is $23,000 plus an additional $7,500 if you are over age 50. If your income is within the IRS limits, you and your spouse may be able to contribute $7,000 each to a tax-deductible IRA ($8,000 each if you are both over age 50). IRA contributions don’t need to occur before year-end and can be made until the April 15 tax filing deadline.

Are you enrolled in a high deductible health plan? If so, consider maximizing your contributions to a health savings account (HSA). If you are employed, consider increasing your payroll HSA deductions to maximize contributions by the end of the calendar year. Or, you can make additional contributions directly to your HSA until the April 15 tax deadline. The maximum contribution is $4,150 for single filers and $8,300 for families, with a $1,000 catch-up contribution if you are over age 55. If both spouses are over age 55, you can both contribute an additional $1,000, though these additional contributions need to be made in each spouse’s respective account.

Charitable donations can be another great way to reduce your tax liability. Review your itemized deductions for the year to see how close you are to the standard deduction threshold ($29,200 if married, $14,600 if single). Consider contributing to a donor-advised fund if you want to bunch several years of charitable donations into one tax year. This way, you get an upfront tax deduction and can dole out the donations in future years. If contributing directly to a charity, those donations need to be received by the charity before December 31 to be deductible for this tax year.

Are you saving for your child’s or grandchild’s college education? You could contribute to a 529 plan to get a possible state tax deduction. To qualify for the deduction, you must contribute to the plan sponsored by the state where you live. For example, married Illinois residents can contribute up to $20,000 to the Bright Start 529 plan and save almost $1,000 in state tax.

Required Minimum Distributions

The Secure Act 2.0 increased the ages when you are required to take distributions from your IRAs. If you are age 73 in 2024, you may need to take your required minimum distribution (RMD) from your IRA or 401(k) plan by December 31. Younger investors (those born in 1960 or later) can delay their first RMD until age 75. If this is your first year taking your RMD, you have the option to delay the first RMD until April 15 of 2025. Keep in mind, though, that you will be doubling up on RMDs in 2025. Also, if you are charitably inclined, you can donate up to $105,000 from your RMD directly to charity as a qualified charitable distribution (QCD). QCDs can be done starting at age 70 ½. QCD distributions count toward your RMD amount and are excluded from income. You will need to keep a record of these donations to give your tax preparer since the donations are not subtracted from income on the tax forms provided by your custodian.