Steps to take now to lower your income tax bill

If you haven’t thought about your 2024 tax situation yet, don’t worry. There are several steps you can take to reduce your tax bill before year end. From donating to charity to maximizing retirement accounts, you may have more opportunities than you think. Consider these ideas.

1. Determine if your income will be higher in 2024 or 2025

Your goal is to lower your tax bill across both 2024 and 2025, so you want to review your potential income and deductions for both years. This way you can make decisions about the timing of events that trigger additional income (such as selling securities at a gain) and those that trigger deductions or losses that can offset that income.

Without further legislative action, the provisions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025 and 2026 tax rates will likely be higher for most households. However, we do know what the tax inflation adjustment amounts are for 2024, which allows for some tax planning now.

If your income will be higher (or the same) in 2024 vs. 2025

In this case your goal is to maximize deductions that can help offset your income. Steps you can take include:

If you plan to itemize your deductions instead of taking the 2024 standard deductions of $14,600 for a single individual or $29,200 for a couple filing jointly:

• Pay your property tax before Dec. 31. If you will not meet the $10,000 SALT (state and local tax) limitation for 2024, you should consider paying property taxes due in January before year end.
• Pay all pending medical expenses during the current year. You can receive a deduction for any medical expenses paid that exceed 7.5% of your adjusted gross income.
• Make charitable contributions. Consider stacking next year’s planned charitable contributions into 2024.

Other moves you should consider before year end:

• Push off one-time income events into next year. If you can control when certain income arrives, push it into next year when possible. Examples include choosing to defer compensation or a bonus or holding off on a sale of property into next year.
• Consider realizing investment losses before year end. Here’s generally how it works:
  • Capital losses offset capital gains;
  • If total losses are greater than gains, you can take a maximum loss of $3,000 to reduce total income;
  • Excess losses can be carried forward to offset future gains, although it can be more beneficial to realize gains in the current year to benefit from the losses taken. When selling an investment at a loss, investors should be aware of the wash-sale rules. These rules prevent investors from claiming a capital loss if they buy the same asset or a “substantially identical” one within 30 days before or after the sale. This means that investors need to be mindful of their trading activity for a total of 61 days. If you buy the same security within 60 days, you won’t be able to claim a capital loss on it.
• Consider a health savings account. HSA’s are accessible to individuals enrolled in high deductible health plans and can be funded either by the individual or their employer. Contributions are exempt from income tax, and withdrawals are tax-free when utilized for medical costs. Cash contributions directed to an HSA by or on behalf of an eligible individual are deductible from the individual's income. Contributions made by an individual's employer are deductible for the employer and exempted from the employee's income.
• Take advantage of possible tax credits:
  • The residential clean-energy property credit is a tax credit for homeowners who install an alternative energy system in their home that relies on a renewable energy source, such as solar, wind, geothermal, or fuel cell or battery storage technology. The credit is equal to 30% of the cost of materials and installation. There is no maximum amount or income limitation to this credit. However, this credit is non-refundable; any excess credit can be carried forward to the following 5 tax years.
  • The smaller energy-efficient home improvement credit is a tax credit that applies to insulation, boilers, central air-conditioning systems, water heaters, heat pumps, exterior doors, windows, and other energy-efficient upgrades that meet certain energy efficiency ratings. This credit can be $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150). You can also get a $2,000 credit for qualified heat pumps, biomass stoves or biomass boilers.

If your income will be lower in 2024

In this case your goal is to trigger income-generating events because your tax rate likely will be lower in a lower-income year. Steps include:

• Take distributions from an inherited traditional IRA. These distributions are taxed as income, so if you need additional funds from the IRA before the end of 2024 it may be advantageous to take them in the year with lower overall income.
• Take trust distributions. Same as above, the distributions can be taxable. Take them in the year that you expect to have lower income (using the 65-day election timeframe can facilitate this).
• Convert your traditional IRA to a Roth IRA. Your traditional IRA dollars were contributed pre-tax, so when you convert to a Roth IRA, the amount you convert is taxable. Converting in a year with lower income can lessen the tax hit on the conversion amount. You can convert the traditional IRA assets all at once or in phases over time. The phased approach can be a good option during the “between times” after you’ve stopped working and before you’ve started taking Social Security and required minimum distributions. Be mindful that the amount being converted can possibly put you in a higher tax bracket.
• Realize capital gains by selling appreciated assets. This is a good option if you’re in the 0% tax bracket (no more than $44,625 of other taxable income for singles; $89,250 for married filing jointly).

2. Maximize tax savings from charitable donations

The IRS offers tax incentives to help you make the most of each dollar you contribute to charity. With advance planning, you can capture some tax benefits. Here are some strategies to help you maximize your tax savings:

• Donate your RMDs. If you are over age 70 ½, and do not need your RMD from your IRA, consider donating it to charity. You can do this by making a QCD (qualified charitable distribution) to the charity, up to a maximum of $105,000. You will not be taxed on the withdrawal and you cannot take the deduction for the donation.
• A taxpayer has the option to classify specific distributions from an IRA to a split-interest entity as if they were donated directly to a qualifying charity, allowing for exclusion from gross income for qualified charitable distributions. The total distributions under this election cannot surpass $53,000 in 2024.
• Donate appreciated securities. If you’ve held the securities for over a year, you can deduct the full market value and avoid paying taxes on the appreciation of the security.
• Establish a Donor Advised Fund. If you have large capital gains or another income event, and you want to limit the tax impact, you can set up a Donor Advised Fund and fund it with all your anticipated future charitable giving up to AGI limits (30% for capital gain property and up to 60% for cash, in 2024). You can then take your time in deciding which charities to give to.
• Harvest losses before you give. If you have property with unrealized losses, don’t give that property to charity. Sell it and take the loss, then give the cash amount to charity and take a deduction of the cash value up to the 60% AGI limit.

3. Save taxes as you save for retirement

As you continue to save for retirement, remember you can tie tax savings into your retirement planning. Here are the two primary ways to do that:

• Maximize retirement plan contributions. If you’re still working and earning income, you should be funding tax-deferred retirement accounts. Here are the maximum contributions and other things to remember:
  • $23,000 maximum contributions for 401(k) in 2024; $30,500 if you’re age 50 or above;
  • $7,000 maximum for IRAs; $8,000 for 50 and over. 2024 IRA contributions can be made any time before April 15, 2025.
  • Contribute enough to your 401(k) to take advantage of your employer’s matching contribution. Don’t leave money on the table!
  • Self-employed individuals can contribute to a SEP IRA. The maximum amount is the lesser of $96,000 or 25% of net business earnings.
• Consider a Roth conversion. Remember what really matters are the income tax rates. If you think your rates will go down in the future, a conversion may not make sense; if you think your rates are going to go up, a conversion could be a good idea.