As the end of 2024 approaches, it’s time for you to think about strategic tax planning. Don’t wait until tax season to optimize your deductions; many valuable moves need to be completed by
Year-end tax planning tips can help you keep more money in your pocket! And I mean who doesn’t want that.
For starters, your books need to be in order. You can’t plan if you don’t know what your taxable net income is. Start by preparing a pro forma 2024 tax return with the help of your tax advisor. This baseline assessment provides insights into your current tax position and allows you to understand how potential income changes or deductions might affect your liability.
Let’s get into some other ways to reduce your tax liability.
Optimize Estimated Payments
Estimated Tax Payment make sure you avoid penalty by planning for your tax liability payment by Jan 15th of the following year to avoid penalty. To calculate your tax liability, you can do your taxable income minus your tax deductions equals your gross tax liability.
High-income earners who pay quarterly estimated taxes should choose between paying based on last year’s tax liability or this year’s expected liability. In a high-interest environment, you may benefit from keeping the difference invested in a short-term, principal-protected account.
Leverage Business Deductions
If you need something new for your business such as computers, or machinery, now’s the time to buy. Deductions on business expenses like these can significantly reduce your tax bill.
- Bonus Depreciation: Deduct 60% of eligible assets, but act fast, as this benefit will reduce to 40% next year.
- Section 179 Deduction: For qualifying vehicles and equipment, you may be able to deduct up to $30,500, or even the full purchase price for specific trucks and vans.
Boost Retirement Contributions
A great way to reduce taxable income is by maximizing retirement account contributions. Not only does this set you up for future financial security, but it also provides immediate tax savings.
- 401(k) Contributions: Max out at $23,000 (or $30,500 if over 50).
- IRA Contributions: Contribute up to $7,000, or $8,000 if you’re 50+.
- Roth Conversions: Consider converting traditional IRAs to Roth IRAs if you expect your income to grow, as this allows for tax-free growth in the future.
Consider a Roth IRA Conversion
If you anticipate a higher tax bracket in retirement, converting traditional IRAs to Roth IRAs may be beneficial.
- Long-Term Growth: Roth IRAs grow tax-free, allowing you to withdraw without taxes later.
- No Income Limits: You can convert as much as desired, regardless of income.
Make Charitable Contributions
Year-end donations not only give back to your community but also help reduce your tax liability.
- Cash Donations: Deduct up to 60% of your adjusted gross income.
- Non-Cash Donations: Items like clothes and household goods donated to qualified 501(c)(3) organizations are deductible at fair market value.
Prepay Business Expenses
Prepaying certain expenses now can be a savvy move to increase 2024 deductions.
- Eligible Expenses: Rent, utilities, and other recurring costs.
- Credit Card Hack: Deductions apply even if you pay the bill in 2025, as long as you swipe by December 31st.
Plan for Required Minimum Distributions (RMDs)
For those turning 73 this year, it’s essential to meet RMD requirements to avoid penalties.
- New RMD Age: SECURE Act 2.0 shifts the start age to 73, allowing for more tax-deferred growth.
- Roth Exemption: Roth 401(k)s no longer require RMDs as of 2024.
Prepay State Taxes
If you live in a high-tax state, prepaying state taxes by year-end can reduce your federal taxable income.
- SALT Deduction Cap: Remember that state and local taxes are capped at $10,000.
- AMT Alert: If you’re subject to the Alternative Minimum Tax (AMT), this strategy may have limited benefits, so check with your CPA.
Year-end tax planning is essential for reducing your tax bill and ensuring you’re not leaving money on the table. From maximizing retirement contributions to optimizing business deductions, these strategies can make a big difference in your 2024 tax outcome.
Remember, each tax situation is unique, so if you have questions contact Paragon today.
