Between spending money for Thanksgiving, Christmas, and New Year’s it’s easy to forget about saving money on taxes before the year ends. After all the parties and gifts, finding a few extra bucks is a welcome relief. Here are three savvy end-of-year tax strategies with a couple of bonus moves to get more bang for your tax bucks.
Max Out Retirement Accounts
This is an easy one since saving money for retirement is always great. Retirement accounts allow your money to grow tax-advantaged.
Upon filing an annual income tax return, you can no longer place money up to the contribution limit in the account. Let’s say over a 30-year career you place $3,000 annually into an IRA account versus doubling the contribution to $6,000. Your total contributions would equal $180,000 at $3k versus $360,000 at $6k. Now, let’s factor in potential growth at 8% per year.
In the first scenario contributing $3,000 per year, you would end up with $444,045. However, upping your contributions to $6,000 per year nets you $888,090 during the same 30-year period.
You are missing out on a ton of money. In today’s world, every penny counts.
BONUS MOVE – A savvy bonus move is strategizing your pre-tax contributions bringing you into a lower income tax bracket, and placing any excess funds into a Roth.
Remember, Roth contributions do not get an upfront tax deduction, but withdrawals in retirement are tax-free. This is a powerful component in your retirement planning.
Tax Loss Harvesting
In this strategy, you match any Long/Short Term Capital Gains with your Long/Short Term Capital Losses. This usually makes sense if you sold any asset for a gain and will owe tax. For the average person, this is most common in taxable brokerage accounts.
This is a great opportunity to sell laggards in your portfolio since you want to find new winners to buy. Thus, if you sold a winner during the year you can reduce the taxes owed on your profits with the losses realized from selling your laggards. Here is an example.
Sold PQR Corp with a $1,000 gain.
Sell STU Corp with a $300 loss.
Sell VWX Corp with a $400 loss.
You can deduct the $700 in total losses from the two companies against your $1,000 PQR Corp gain. That means you only need to pay tax on your $300 net gain.
Contribute To A 529 Higher Education Savings Plan
If you can save enough money towards your retirement then it’s often feasible to set aside a few dollars for your children’s future education goals. There is no Federal income tax deduction but many States offer a deduction on the state income tax return.
This will help lower your taxable income and may potentially increase your tax refund. Since you’re contributing now, you only wait a few months to realize the higher tax refund.
Power up this move by asking family and friends instead of toys you would accept a small gift for your children’s future educational needs.
BONUS MOVE – For savvy Grandparents, Aunt, or Uncle this is an opportunity to gift cash to beloved younger family members as part of your estate planning. You can gift family members up to $18,000/yr tax-free in 2024 if reported properly to the IRS. The gift exclusion will increase to $19,000 in 2025.
529 plans have a DOUBLE BONUS feature which allows you to front-load 5 years’ worth of gifts into a single tax year. That means financially stable elders can gift up to $90,000 in a lump sum. That’s a surefire way to jumpstart higher education goals. If you have a more modest budget, even $100 is kind and generous!
Most family members would appreciate this type of boost instead of a toy that ends up in the trash after 6 months. If you’re the parent don’t be afraid to ask for this as a gift. Many people understand the burden higher education places on families. Just make sure to thank your family members with a handwritten note.
I hope you find value in these tax-saving tips and put them into practice!
