It’s Not too Late to Reduce Your 2024 Tax Bill

As we step into the fourth quarter of 2024, it's a good idea to look at your tax situation to determine if you can do anything to minimize taxes before we leap into 2025. You might be surprised at what a few adjustments can do to your income or portfolio.

Increase Pre-tax Retirement Contributions

If you're employed, contributions to your employer's retirement plan (401k, 403b, 457b) are deductible from income; thus, no tax is assessed on your contribution amount. The same applies to self-employed retirement accounts (SEP IRA, Simple IRA, Solo 401k). If you're not on target to max out your contributions this year, increase your deferrals as much as possible to ramp up savings while reducing taxable income.

These contributions don't only help build a nice retirement nest egg; they also help reduce your taxable income during your high-income working years. Retirement account contribution limits for 2024 can be found at: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits.

If you have earned income, you may be eligible to make deductible contributions to a traditional IRA. You can also make contributions to an IRA for your spouse, even if he/she doesn't work. IRA contributions for this year can be made as late as Tax Day 2025 (without extensions).

Contribution limits and deductibility rules for IRAs can be found at: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits.

Eligible for a Health Savings Account?

If you're not on target to max your HSA contribution, save as much as you can to take advantage of the tax deduction and the benefits of the HSA. Not only are your deposits to the HSA deductible from income, but distributions are also nontaxable when used for qualifying health care expenses.

Like the IRA, contributions to the HSA for 2024 can be made until Tax Day next year (without extensions). Information about health savings accounts and the contribution limits can be found at https://www.fidelity.com/learning-center/smart-money/hsa-contribution-limits.

Qualified Charitable Distribution (QCD) and from IRAs

If you're 70 ½+, consider making gifts to charity directly from your IRA via the QCD strategy rather than by cash or appreciated securities, especially if you use the standard deduction. Direct donations from the IRA to a 501(c)(3) organization are exempt from taxes. Because the IRA distribution is not taxable, the gift to charity(ies) is not deductible on Schedule A.

A QCD can be used to donate a maximum of $105,000 (2024) to charities per year. If married, both spouses can max out their donations from their respective IRAs at $105,000. The QCD also counts as part or all of your required minimum distribution (RMD) amount from traditional and Inherited IRAs.

Note that your tax form 1099R will not distinguish the amount of your reported IRA distribution allocated to charities. So make sure you record those that were, and remember to indicate your charitable gift amount on Line 4a of your tax return!

Lump Charitable Gifting

Will you incur a larger tax event this year, such as the sale of a business or a large Roth conversion? If you're charitable, you could benefit from utilizing a donor-advised fund (DAF) to make a larger donation in this high-income year.

For example, if you typically gift to charities $15,000 annually, consider making three years' worth to the DAF in the high-income year ($45,000 donation). The gift is deductible on Schedule A and will be greater than the standard deduction amount. Funds in the DAF are available for charitable gifting in future years. Gifts made from the DAF are not tax-deductible.

Capital Gains on an Investment

Maybe you sold an investment that incurred a large capital gain. Capital gains taxes are assessed on the difference between your purchase price and the sale price.

For example, if you purchased 200 shares of Lilly stock in August 2022 for $320 per share and sold those 200 shares at $940 in July 2024, you would have incurred $124,000 of long-term capital gain. Depending on your income situation, you would be required to pay a capital gains tax of 15% to 23.8% on those gains and, in most states, an additional state income tax (some states as high as 13.1%).

Even 15% of $124,000 is a $18,600 tax hit on that nice gain! If the shares were held for less than 12 months before the sale, that $124,000 short-term gain would be taxed at your ordinary federal and state income tax rate. For some, the federal tax rate alone is 37%!

Short and long-term capital losses can offset long-term capital gains. Short-term losses are first used to offset short-term gains. Any excess is applied against the long-term gain. If you have an investment(s) that has taken a dive, you might want to sell and realize the loss for the offset. Want to buy that exact investment back? Wait at least 30 days to buy to avoid the wash-sale rule, which would cause you to forgo the loss offset.

Summary

Having a sizable amount of taxable income sounds and feels great until tax time. Make a point to talk with your tax preparer or financial advisor to do an estimated tax projection mid-year and develop a plan for minimizing taxes that makes sense for you. Implementing the plan won't only reduce your tax bill, it should benefit you financially over the long term!

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