While there is currently some uncertainty of the future of taxes at the time of this publication, (although when is there really not?) we do know that the current federal income tax rates for individuals are set to expire at the end of 2025. Based on that most likely eventuality, there are some things you may be able to do this year and next to lock in current rates while we wait to see how the future of US tax rates plays out in Washington.
So as we enter the final stretch of 2024, let’s review 6 potential tax planning or tax savings moves you may want to make before we ring in the New Year.
Charitable deductions. While the $10,000 limit for deducting state and local taxes (aka “SALT limit”) still exists for both single and married tax filers, those who are charitably inclined may wish to bundle gifts into either this year or next in order to realize a bigger tax benefit through itemizing deductions than you would have through the standard deduction. Best for folks who have mortgage interest, consider making your 2024 and 2025 gifts all at once near year-end in order to push you over the limit for itemizing.
For 2024, the standard deduction is $14,600 for single tax filers and $29,200 for married filing joint (although the SALT limit is $10,000 for either status, making it an advantage for single filers). Meaning your $10,000 SALT plus mortgage interest plus charitable contributions would need to exceed those amounts to offer any tax benefit. Note that the amount of the benefit is really just any amount OVER those standard deduction amounts, so it may not be worth a stretch of your finances to get over that limit if it won’t be substantial.
Alternatively, if you have required minimum distributions (RMDs) from retirement accounts that you don’t necessarily need, you can avoid taxation of up to $105,000 of those distributions by taking advantage of the qualified charitable distribution rule. Basically, the rule states that if you make your RMD directly to a qualified charity, you will satisfy the RMD rule without having to claim the distribution as income for tax purposes. This is a great alternative for those who wouldn’t otherwise be itemizing who also don’t need the money from their RMD.
Gift appreciated stock. Is your religious organization or favorite non-profit embarking on a big capital project to which you’ve made a large dollar pledge? Rather than paying that pledge on a weekly or monthly basis with cash, consider fulfilling your entire commitment with a gift of appreciated stock. You’ll save the cash as well as capital gains taxes.
Pre-pay tuition, if possible, but not state estimates (unless you haven’t hit the $10k SALT cap yet). If you have a college student with a tuition bill due in early January, consider making that payment before year-end so you can realize the tax benefit a full year earlier. However, the advice of pre-paying state estimated income taxes is not as applicable this year, due to the aforementioned SALT limit. You can wait until the January 15, 2025, due date to make that payment as it will likely not help you save on 2024 taxes if you pay it earlier.
Use up your FSA money. Some plans let you roll up to $500 into next year, but not all. If you still have any money left in your flexible spending account, make sure you stock up on band-aids, sunscreen or any other qualified products to make sure you don’t lose that money.
However, this advice does NOT apply to HSA money, which carries over indefinitely for future medical expenses, even if you are no longer enrolled in an HSA-eligible healthcare plan. Best to let those funds remain in your HSA for future expenses and ideally to grow in the account to fund future healthcare expenses in retirement.
Check your income against Roth IRA contributions. If you’ve made Roth IRA contributions this year but suspect you may be getting close to the income limits, check that now. You’ll have better corrective options than waiting until you actually prepare and file your tax return, even if you do end up exceeding the limit.
Look into making Roth IRA conversions. Even if your income exceeds Roth IRA contribution limits, you can still get some money into a Roth IRA by converting pre-tax retirement savings due to the current lack of income limits on those transactions (although you will pay taxes on it!). This move specifically requires more careful tax planning due to the changing nature of tax brackets and rates, but if you know that you’re in a lower earning year or you are quite confident that you’ll be in a higher income tax bracket in the future, the next 2 years offer the opportunity to lock in current tax rates on previously contributed retirement funds that haven’t been taxed yet.
The idea is to “fill up” your current tax bracket with Roth conversions without going over into the next highest bracket and/or incurring unnecessary net investment income tax if your adjusted gross income is close to the $200,000/$250,000 limit for Single/Married filing jointly taxpayers. Just make sure you have cash outside your IRA to pay the additional tax you’ll incur for any conversions, and try to time any conversions to market downturns if possible, for optimal tax planning.
No need to rush with these though
Two things that can wait? Contributions to IRAs and HSAs – you have until April 15, 2025, to make sure you’ve maxed out any pre-tax individual retirement account, SEP-IRA or health savings accounts and still deduct it against 2024 income (even later if you’re using a SEP-IRA or other self-employment based account if you extend the due date of your return).
Want our help with this? Creating and reviewing income tax projections to help decide whether any of the above moves are worth it is part of what we do for our Prosper for Individual clients. Reach out today to update your information or schedule a chat to get started so you have ample time to make your 2024 tax planning moves before we all sing Auld Lang Syne and ring in 2025.
Disclaimer: The content of this post and any post on our blog is for information purposes only and is not considered to be tax, investment or legal advice. For a specific recommendation tailored to your unique situation, contact your tax or financial professional.