As we move into the final months of the year, now is the perfect time to review your tax strategy and make any necessary adjustments. By being proactive, you can maximize your tax savings and avoid last-minute stress when tax season arrives. Here are five key tax strategies to consider implementing before the year ends:
1. Maximize Retirement Contributions
Contributing to your retirement accounts is one of the most effective ways to reduce your taxable income. If you haven’t maxed out your contributions for the year, now is the time to do so. For 2024, the contribution limit for 401(k) plans is $23,000 if you’re under 50, and $30,000 if you’re 50 or older. For traditional IRAs, the limit is $6,500, with an additional $1,000 catch-up contribution allowed if you’re over 50. Contributions to these accounts are tax-deductible, which can lower your taxable income and reduce your overall tax liability.
2. Consider Tax-Loss Harvesting
If you have investments that have underperformed this year, consider selling them to offset any capital gains you’ve realized. This strategy, known as tax-loss harvesting, allows you to use losses to reduce your taxable income. You can offset up to $3,000 of ordinary income with capital losses each year, and any remaining losses can be carried forward to future tax years. Keep in mind that you’ll need to be mindful of the wash-sale rule, which prohibits you from repurchasing the same or substantially identical security within 30 days of the sale.
3. Review and Adjust Your Withholding
Significant life changes, such as marriage, divorce, or the birth of a child, can affect your tax situation. If you’ve experienced any of these events this year, it’s essential to review and adjust your withholding to ensure you’re not underpaying or overpaying your taxes. The IRS provides a withholding calculator on its website to help you determine the correct amount to withhold from your paycheck. Adjusting your withholding now can prevent an unexpected tax bill or a smaller-than-expected refund when you file your taxes next year.
4. Make Charitable Contributions
Donating to qualified charitable organizations is a great way to give back to your community and reduce your tax liability at the same time. Charitable contributions are tax-deductible, and you can claim them even if you itemize your deductions. Keep receipts and documentation for all donations, as the IRS requires proof of contributions to claim the deduction. Consider donating appreciated assets, such as stocks, to maximize your deduction while avoiding capital gains taxes on the appreciation.
5. Take Advantage of Education Tax Credits
If you or your dependents are pursuing higher education, you may be eligible for valuable education tax credits. The American Opportunity Tax Credit (AOTC) offers up to $2,500 per student for the first four years of college, while the Lifetime Learning Credit (LLC) provides up to $2,000 per taxpayer for qualified education expenses. These credits are available for tuition, fees, and other education-related expenses, and they can directly reduce your tax bill. Be sure to review the eligibility requirements and keep records of your education expenses to claim these credits.
Implementing these tax strategies before the year ends can help you optimize your tax situation and ensure you’re prepared for tax season. Don’t wait until the last minute to make these important decisions.
For personalized guidance and to ensure your tax strategy is on track, contact our office at (202) 824-8123. Our tax professionals are here to help you navigate these mid-year adjustments and optimize your tax situation.
