Year end considerations
For most things in the tax world, once the clock strikes midnight on December 31st, so does your chance to change your tax position for the year. It’s one of those things you vow to do better at come March or April, but life gets busy, things change, and tax planning often falls off our radar. This is your reminder!
Here are some things to ask yourself before you bring in the new year.
Did I max out my employer-sponsored accounts?
These are the accounts your employer can offer you on a pre-tax basis that are typically not discriminatory based on your income, like a 401(k), 403(b), or 457 plan, an HSA, or FSA.
The 2024 limits for these accounts are as follows:
401(k): $23,000 with a catch-up contribution of $7,500 for those individuals over 50
HSA: $4,150 for an individual plan or $8,300 for a family. If you are 55 or older, you can fund an additional $1,000. These health savings accounts work very much like the best of a traditional IRA (funded pre-tax) and a Roth (funds grow tax-free as long as used for qualified expenses). The money can carry over year to year with no limits, making it a great financial tool for accumulating wealth and saving for care in your golden years. You must have a high-deductible health plan (HDHP) to participate.
FSA: $3,200. Please remember, this is a "use it or lose it" plan, so if you have funded it, be sure to utilize the funds before year-end, as you can only carry over up to $640 if your plan allows for carryovers. For more information on what is considered an eligible medical expense, check out IRS publication 969.
Did I sell stock that resulted in a gain?
Investment income is one that taxpayers need to keep on their radar because this income is typically not subject to withholding like W-2 income, meaning there are no taxes prepaid against the related liability. It can often become a surprise to taxpayers at tax time that they have a large balance due because of this extra income. To minimize the impact, you can do what people refer to as ‘harvest losses.’ This is when you sell off your losers or underperformers in your portfolio and use these losses to offset your gains. If you sell too many losses, you can completely offset your gains. However, note that capital losses are limited to $3,000/year and will be carried over until fully absorbed. It’s important to be strategic in your loss harvesting to best match your gains and losses.
On a similar note, if you know you have a capital loss carryover that you have not been able to utilize, are there any stocks in a gain position that you’d want to sell? This might allow you to bring in some tax-free income before year-end.
This strategy does not apply to funds held in a retirement account.
Did I make any energy-efficient home upgrades? Should I before year-end?
The tax law changed in 2023 to allow the home energy-efficient tax credits to have an annual maximum rather than a lifetime maximum. The new annual limit is $3,200. The credit is up to 30% of your qualified costs, which include things like energy-efficient windows, doors, heat pumps, and water heaters. I encourage you to do some research to make sure your improvements are eligible before committing to the spending if the credit is a big motivator. If you know your improvements are eligible, you might consider doing some in December and pushing others to January. You can find more information about that here.
Should I be contributing to charity?
For charitable contributions to count toward your current deductions, they must be funded before year-end. A few things to remember when it comes to charitable contributions:
You must itemize to claim a deduction for charitable gifts.
If it is a cash contribution over $250, you’re required to have a ‘charitable acknowledgment letter.’ This is provided by the charity. This will come up if under audit, and this particular area of your return is of interest to the IRS.
If it is a non-cash contribution and over $500, you need to have documentation. If you’re a big supporter of the Goodwill or Salvation Army, please note that if your total donations are over $5,000, you’re required to have a qualified appraisal of the goods. This is no doubt challenging since you’ve likely already donated your items, and it was over 20 trips throughout the year. Given this requirement, tread lightly when filling out your tax organizer.
Donor-Advised Funds (or “DAF”) are one of my favorites to suggest to clients, especially those with appreciated stock. A DAF is a fund that you manage, like a brokerage account, that is permanently earmarked for charitable use. It allows you to claim a tax deduction in the year you funded the DAF without actually giving it to a charity. This can be done in a future year. Additionally, if you have appreciated stock, you’re able to claim a fair market value deduction for the contribution to the DAF. I have seen families use this as a platform to promote charitable giving in their children at a young age, and in one instance, even creating a family foundation that allowed their family to make a tradition of picking which charities to support on an annual basis.
Was I supposed to take a required minimum distribution (RMD) this year?
The RMD rules have been like an episode of Fixer Upper over the past few years as Congress continues to tweak the rules on when they’re required. Simply put, if you turned 73 this year, you’re required to take it. These are the amounts that you have to withdraw on an annual basis from your traditional IRA, SEP, SIMPLE, or other retirement plan to avoid penalties. This does not apply to your Roth IRA. The RMD is calculated using actuarial tables provided by the IRS and the value of your retirement accounts. You can find more information here.
We are here to help answer questions and get you ready for the upcoming 2024 tax season. Feel free to contact us if you think you’d benefit from a year-end projection or tackling one of these subjects on your 2024 taxes.
