Like committing to annual spring cleanings, scheduling time to review and implement fall tax strategies can often result in tax savings. To help with optimizing your financial situation for not only this year, but potentially next year as well, it’s important to consider incorporating year-end tax strategies such as maximizing retirement plan contributions and donating to charities, as well as other actions for reducing the tax burden when April Tax Day rolls around.
Here are six actionable tax planning strategies to consider as we close out 2024:
1. Harvesting investment losses
Review your investment portfolio with your wealth advisor and discuss whether it makes sense to sell underperforming assets for realizing losses, based on your current goals. One tactic is to sell both winners and losers to offset gains with losses by: 1) tallying any gains, and 2) cashing out losing positions of equal or greater value. If losses are more than gains, you can deduct up to $3,000 of those losses (additional losses carryover to future years). In addition, up to $3,000 of losses in excess of gains can be used to offset ordinary income from other sources.
Keep in mind that the wash-sale rule prevents an investor from tax loss harvesting if the same security (or one considered substantially identical) is purchased within 30 days of the trade that created the loss. The IRS designed this rule to prevent investors from selling a security to realize a capital loss for tax purposes and then immediately buying it back to maintain the investment position.
2. Charitable donations
Review the charitable contributions you’ve made this year and consider if other philanthropic efforts would impact your tax situation. Cash, check and charged donations to qualified charities can be deducted up to 60% of adjusted gross income (AGI). While money and personal checks are most used for donations, charged gifts are deductible in the year charged, not the year the credit card bill is paid. Taxpayers who itemize deductions can also donate other assets such as cars, boats, clothes, or furniture and deduct their full value. The AGI limit for non-cash gifts is 30%. For 2024, the standard deduction is $14,600 for a single person and $29,200 for a married couple, which can be taken if you don’t have itemized expenses that add up to those amounts.
Contributing appreciated long-term investments to a donor-advised fund (DAF) can help you support a favorite cause while optimizing tax efficiency. You can avoid capital gains recognition and claim a tax deduction for the entire fair-market value of your donation, typically up to 30% of AGI. DAFs generally have flexible requirements, easy administration, and minimal start-up costs. For instance, you can set up your DAF for periodic giving, making donations anonymously, or making international grants. And most charitable organizations qualify for DAF grants, according to IRS rules. Other options include a variety of charitable trusts which are best funded with appreciated securities.
If you have a stock that’s been held for longer than one year, determine whether it has appreciated or depreciated to find the optimal way of donating it. With appreciated stocks, you can donate directly to a charity, obtaining a full deduction without incurring capital gains tax. Selling depreciated stocks and contributing the proceeds to charity allows you to claim a capital loss as well as a charitable deduction on your tax return.
For those who give more to charity then their AGI allows, there is a five-year carryover allowance to future years.
3. Utilizing annual gift tax exclusions
Beyond charitable contributions, when you gift an asset — such as cash, stock, or a vehicle — the IRS will likely want information and potential tax payments. The good news is your gift or estate can be exempt from taxation through several methods of tax-free transfer:
| For 2024, a taxpayer may gift up to $18,000 per recipient ($36,000 for married taxpayers filing jointly) without gift tax consequences. |
The current lifetime exemption is $13.61 million per taxpayer but that amount is expected to drop by approximately half in 2026. Making direct payments to medical and educational providers are unlimited gifts for gift tax purposes, though these two special types of gifts are not counted in the annual $18,000 per person limit. Gifts are not tax deductible by you as well as not being taxable income to the recipient.
For gifts other than cash, the recipient receives your cost basis and holding period.
4. Checking on your required minimum distributions (RMDs)
If you’re age 73 and older, it’s essential to complete required RMDs from tax-deferred retirement accounts by year’s end. Missing the deadline can result in a hefty 25% penalty on the RMD portion if not property withdrawn.
A little known benefit is that you can donate up to $105,000 to charities directly from your individual retirement account (IRA) using a qualified charitable distribution (QCD). There’s no tax deduction for the donation, but the contribution can satisfy minimum distribution requirements without adding to your taxable income.
If you are turning 73 in 2024 or 2025, consider a one-time election to postpone their first RMD. This election postpones the first RMD to as late as March 31 of the following year, but also requires the second RMD to be taken by December 31 of that year. With this option, you will take two RMDs in one calendar year.
5. Considering Roth options
You may be able to use a Roth account to make the most of savings while minimizing your tax bill. It’s important to consider that, unlike a traditional individual retirement account (IRA) funded with pre-tax dollars, contributions to a Roth account are made with after-tax dollars. However, distributions and earnings can be withdrawn tax-free at retirement and Roth IRAs aren’t subject to RMDs. In 2024, the exemption from RMDs was extended to Roth 401(k), 403(b), and 457(b) accounts.
If your employer offers a Roth 401(k) plan and you haven’t maxed out your contributions to a traditional 401(k) this year, consider making after-tax contributions to a Roth 401(k) before year-end. This strategy can provide you with tax-free withdrawals in retirement, and you can contribute up to the $23,000 limit ($30,500 for taxpayers aged 50 or older) minus your traditional 401(k) contributions.
If you’re a high-income earner, you might be able to maximize retirement savings through a “mega backdoor” Roth account, provided your workplace retirement plan allows it. After maxing out pretax 401(k) contributions, after-tax dollars can be contributed up to the annual limit of $69,000 ($76,500 for taxpayers aged 50 or older) and these funds can be converted to a Roth IRA. Quick rollovers are essential for minimizing tax on investment returns.
The Roth IRA can be especially helpful for those who expect to be in a higher tax bracket in retirement because withdrawals from a Roth account are tax free and there are no RMDs. Single tax filers must have a modified adjusted gross income (MAGI) of less than $161,000 in 2024. If married and filing jointly, MAGI must be less than $240,000.
A Roth conversion is another option. By converting pre-tax savings from a traditional IRA to a Roth IRA, you can enjoy tax-free withdrawals in retirement. To manage the tax implications, ensure that you convert an amount that keeps you within your current tax bracket.
6. Maximizing savings plan contributions
You can still contribute the maximum amount to your tax-deferred employer-sponsored retirement plan, such as a 401(k). Up until April 15, 2025, you can contribute to a health savings account (HSA) or IRA. Your contribution strategy can help defer income to your retirement years when you could be in a lower tax bracket.
A 529 college savings plan helps families pay for education expenses. While contributions aren’t deductible for federal tax returns, many states offer a deduction for contributing to a qualified 529 plan up to a certain dollar amount, and earnings on the contributions can grow tax free (if withdrawn for qualified expenses).
For those that are self-employed, SEP-IRA’s can be contributed to as late as the extended filing date of your return, though funding is required before your returns are filed.
Questions?
With the tax-filing deadline only months away, it’s not too late to take proactive steps now to help manage your tax bill before we ring in the New Year. In fact, some tasks shouldn’t wait until next year; seize valuable opportunities now to give to charities to help reduce the amount of taxes owed. Note that there may be significant changes to tax laws at the end of 2025 on account the expiration of tax reform as well as the upcoming Presidential Election, which may also speed up the need for tax planning.
It’s important that your investment and tax strategies make the most sense for your financial plan and long-term goals. At Mercer Advisors, we have an in-house tax team that collaborates with you and your advisor to help ensure you have an integrated and comprehensive wealth management solution. Reach out to your wealth advisor for help with the right tax strategies for your situation.
If you’re not a Mercer Advisors client and want help with your taxes as well as other financial concerns, let’s talk.
