October 9, 2024
It’s The Most Wonderful Time Of The Year
by Allison R. Miller, CFP®, AIF®
If you have visited any big box stores recently, you might have noticed Halloween and Thanksgiving are almost over, and Christmas is just around the corner. Also looming on the horizon is everyone’s favorite day of the year, April 15th! If you haven’t started planning your Tax Day celebration or how to spend your refund, now’s the time to get moving. Much like those stores, we want to help clients prepare for the upcoming holiday season before it is too late.
Whether you get a promotion, sell a property, or retire, changes in income are inevitable. When they happen, there are various tax planning strategies to consider. We work with clients to stay informed about income changes each year to help us, alongside their tax advisor, determine the best strategies to deploy.
Maximize Retirement Plan Contributions
For individuals who are still working and who have flexibility in their budget, increasing or maximizing retirement plan or IRA pre-tax contributions can reduce current year taxable income. For 2024, the contribution limit for 401(k)s is $23,000 with catch-up of $7,500 for participants age 50 or older. The contribution limit for IRA (Traditional or Roth) is $7,000 with catch-up of $1,000 for individuals age 50 or older, subject to income limitations.
Maximize Lower Income Years
For taxpayers who are in a lower tax bracket this year than where they would normally file, a Roth conversion may be a way to take advantage of the lower tax rate. A Roth Conversion involves moving funds from a Traditional IRA to a Roth IRA. The transaction creates current year income, but the Roth assets grow tax-free, are distributed tax-free, and never have Required Minimum Distributions (RMDs).
Alternatively, individuals with large unrealized capital gains may take the opportunity to realize capital gains at much higher amounts given the lower effective rates. See chart below.
Harvest Capital Losses
Individuals who have realized capital gains this year may offset the tax impact of those gains by harvesting capital losses before the end of the year, when available. With much of the market being up this year, however losses are harder to come by.
Charitable Giving
Another method for reducing taxable income is charitable giving. Individuals age 70 ½ and older are able to make gifts from their IRAs, called Qualified Charitable Distributions (QCDs), without those distributions counting towards their taxable income (like regular IRA distributions would).
For charitably inclined individuals who are over age 73 (and therefore required to distribute a portion of their IRA each year, referred to as Required Minimum Distributions (RMDs)), donating a portion of the RMD to charity will exclude that amount from taxable income. The maximum amount of QCDs an individual can make in any year is $105,000.
Itemizing Deductions
Taxpayers who are able to itemize deductions can further benefit from the following types of charitable donations:
- Taxpayers can deduct cash donations up to 60% of their Adjusted Gross Income (AGI).
- Taxpayers can deduct donations of highly appreciated stock up to 30% of their Adjusted Gross Income (AGI).
- In a high-income year, taxpayers can deduct contributions to a Donor-Advised Fund (DAF).
As the holiday season approaches, it’s essential to stay proactive with your tax planning to maximize your benefits and minimize your liabilities. Whether you’re stuffing your retirement accounts like a Thanksgiving turkey, converting to Roth like a holiday miracle, or giving to charity like Santa on a mission, there are plenty of ways to keep Uncle Sam from taking too big a bite out of your pie. Keeping abreast of changes in your income and consulting with your tax advisor can help you make informed decisions. With a little planning, you can breeze through tax season and maybe even have some extra jingle in your pocket for the new year!