As we approach the end of the year, tax season is quickly approaching, and it’s time to start handling your tax-related matters. The decision you need to make is optimizing your overall tax situation, which means minimizing the total amount of taxes you expect to pay for the 2024-2025 tax year.
End-of-year tax planning involves reviewing your income, deductions, and tax payments to ensure that all tax-related tasks are completed before the deadline. By doing so, you can avoid scrambling for last-minute solutions and missing out on potential money-saving opportunities.
Identifying potential tax-saving opportunities, such as tax deductions and credits, can significantly reduce your tax burden. Proactive planning allows you to have enough time to gather required documents, make informed decisions, and avoid the stress that comes with last-minute filing or extensions.
By adjusting the timing of income and deductions, you can optimize your current and future tax situation. Now is the optimal time to maximize contributions to retirement accounts, which not only lowers taxable income but also allows for deferred taxation. Lastly, staying informed about changes in tax laws can help you adjust your strategies to seize new opportunities or mitigate risks. Let’s get started!
Of course, there may be costs involved in seeking professional tax services, but the money saved through tax deductions could potentially outweigh the expenses incurred.
Here are some tips on how to find a proficient tax professional:
Seek recommendations from friends, family, or colleagues, as personal recommendations can be highly valuable.
Check qualifications such as Certified Public Accountant (CPA), Enrolled Agent, or tax attorney.
Verify their experience in handling tax situations similar to yours, such as self-employment, real estate, domestic or overseas investments.
Conduct a background check by reviewing ratings, reviews, and complaint records on relevant websites.
Request quotes from professionals, evaluate the fee range, and services offered.
Schedule interviews with them to discuss your needs and assess whether their communication style and approach suit you.
While receiving a large refund from the Internal Revenue Service (IRS) each year may seem great, it essentially means you’re lending your money interest-free to the government. Your goal should be to aim for a tax withholding close to a “zero balance.”
If you are a W-2 employee, the only income you may be able to defer is discretionary bonuses. However, if you are self-employed, there are more options for deferring income. Issuing invoices to clients before the year-end and receiving payments early in the following year can help manage income timing. But if you anticipate a higher tax rate in the coming year, it’s advisable to concentrate income in the current year instead, even offering discounts for clients who make early payments.
In 2024, the contribution limit for a 401(k) account is $23,000, increasing to $23,500 in 2025. If you are 50 years old or older by December 31, you can make catch-up contributions of up to $7,500 in both 2024 and 2025. This could be an ideal opportunity for delaying taxation until retirement when you might be in a lower tax bracket while also growing your retirement savings. At the very least, maximize your deductions to receive all matching contributions from your employer.
Gift tax applies to transferring money or property (such as stocks, vehicles, collectibles, real estate) to others. The annual gift tax exclusion for 2024 is $18,000 per person, potentially doubling to $36,000 for married couples.
If you exceed the annual gift tax exclusion, you may need to file a gift tax return, and your gifts could count towards your lifetime gift tax exemption. In 2024, not only do you have the $18,000 annual gift tax exclusion, but you can also take advantage of a lifetime exemption of up to $13.61 million.
For those with real estate or rental properties, estimated property taxes are typically included in your monthly mortgage payments. If not, consider paying the full amount of the current year’s property taxes by December 31 to reduce your taxable income and claim a deduction for property taxes when filing taxes.
A simple year-end strategy is to pay January’s mortgage by December 31 to increase the deductible mortgage interest. Of course, this strategy only benefits if you itemize deductions rather than taking the standard deduction.
If you itemize deductions and make donations to qualified charitable organizations (501(c)(3) certified), it’s crucial to keep detailed donation records, recipient information, and obtain receipts or acknowledgment letters confirming donation dates and amounts from the organization. For cash donations, keep bank records as proof.
We’ve covered some key and common tax-related topics. The increase or decrease in deductions and credits depends on annual tax rate changes.
There are many other lesser-known deductions and credits available, such as the electric vehicle tax credit for 2024: new electric vehicles qualify for a $7,500 credit, while used electric vehicles qualify for a $4,000 credit.
Additionally, there is the Residential Renewable Energy Tax Credit. This credit applies to 30% of the eligible clean energy home improvement costs installed between 2022 and 2023. Qualified upgrades include solar panels, solar water heaters, geothermal heat pumps, fuel cells, and wind turbines. Even direct installation labor costs during the process may be eligible for the credit.
Year-end tax planning can significantly enhance your financial situation. Implementing these measures can save substantial tax amounts and improve financial planning, which should be a regular practice for everyone.