As the year draws to a close, it’s time to focus on tax planning strategies that can set you up for financial success in 2024 and beyond. Thoughtful year-end tax planning not only helps you make the most of your hard-earned money but also positions you for a more secure retirement. Here are 12 strategies to consider as you wrap up the year.
1. Strategize Roth Conversions
One of the most effective tax strategies is to plan Roth conversions carefully. By transferring funds from a traditional IRA to a Roth IRA, you convert taxable income into tax-free income for retirement. This move can also lower your required minimum distributions (RMDs) by reducing your traditional IRA balance. However, remember that the converted amount is taxable in the year of conversion, so plan accordingly to manage the tax hit.
2. Reduce Taxable Income
Reducing your taxable income is a fundamental year-end strategy. Consider making deductible contributions to retirement accounts, like a 401(k) or traditional IRA, or donating to charity to lower your taxable income and potentially land in a lower tax bracket.
3. Be Aware of the AMT
The Alternative Minimum Tax (AMT) can catch many off guard. If you have significant deductions or income that triggers this tax, you may need to adjust your strategy to minimize its impact. Consult with a tax advisor to understand if you’re at risk and how to mitigate it.
4. In a Low Tax Bracket? Pick Up Capital Gains
If you find yourself in a low tax bracket, consider realizing capital gains. This strategy can help you take advantage of lower tax rates and reset your investment’s cost basis, potentially reducing future tax burdens.
5. Pay Attention to the Medicare Surtax and NIIT
High earners need to be aware of the additional Medicare tax and the Net Investment Income Tax (NIIT), which are triggered by certain income thresholds. Proper planning can help you manage your income levels and reduce these taxes.
6. Higher Standard Deduction for Seniors
For those aged 65 or older, the standard deduction is higher, which can reduce your taxable income. Make sure to take advantage of this benefit when planning your taxes.
7. Understand Social Security Benefit Taxation
Knowing how your Social Security benefits are taxed can help you better manage your overall tax liability. For some, a portion of these benefits may be taxable, depending on your additional income levels.
8. Consider Tax-Friendly States for Retirement
Thinking of relocating in the coming year? Evaluate states with favorable tax conditions for retirees. Choosing the right state can significantly impact your tax expenses and enhance your retirement savings.
9. Harvest Tax Losses
If you’ve experienced investment losses, consider tax loss harvesting to offset gains. This strategy can help reduce your taxable income and balance your portfolio.
10. Review Your Estate Plan
Year-end is a good time to review your estate planning documents. Confirm that your plans align with your current financial situation and take advantage of any available estate tax strategies.
11. Maximize Retirement Contributions
Ensure you’re maximizing contributions to retirement accounts, such as IRAs and 401(k)s, to benefit from tax-deferred growth and potential tax deductions.
12. Consider Getting Professional Help
Navigating the complexities of tax planning can be challenging. Consider consulting a tax professional to ensure you’re making the most informed decisions and taking advantage of all available strategies.
With these year-end tax planning strategies, you can better prepare for a prosperous financial future. By taking proactive steps, you’ll be well-positioned to protect and grow your wealth in the coming years.