Setting the Stage for Next Year’s Tax Planning

By Published On: November 21, 2024Categories: Articles

As the year draws to a close, it’s time to take stock of your financial landscape and prepare for the upcoming tax season. Proactive tax planning now can set you up for success in the year ahead, ensuring you maximize savings, avoid last-minute stress, and take advantage of available deductions and credits. Here’s a guide to help you wrap up the year and start the next one on the right financial foot.

Review Your Current Year’s Financial Picture

The foundation of effective tax planning is understanding where you stand financially. Gather and review records for income, expenses, investments, and major transactions from the year. This will help identify:

  • Taxable income for the year.
  • Potential deductions, such as medical expenses, charitable contributions, or business-related costs.
  • Opportunities to defer income or accelerate expenses to optimize your tax liability.

Maximize Tax-Advantaged Contributions

Before the year ends, consider contributing to accounts that offer tax benefits:

  • Retirement Accounts: Contributions to 401(k) plans, traditional IRAs, or SEP-IRAs can reduce your taxable income. Confirm contribution limits and deadlines.
  • Health Savings Accounts (HSAs): If you have a high-deductible health plan, maxing out your HSA contributions can provide triple tax advantages: contributions, growth, and withdrawals for qualified expenses are tax-free.
  • 529 Plans: Contributions to these education savings plans might offer state-level tax deductions or credits.

Charitable Contributions

Charitable giving can be a powerful tool for reducing your tax liability:

  • Donate cash or non-cash items to qualified organizations and ensure you get a receipt.
  • Consider using a donor-advised fund (DAF) to manage larger charitable contributions.
  • For those 70½ or older, Qualified Charitable Distributions (QCDs) from IRAs can satisfy required minimum distributions (RMDs) while lowering taxable income.

Check Flexible Spending Accounts (FSAs)

Funds in FSAs often have a “use-it-or-lose-it” rule. Review your balance and spend any remaining funds on eligible medical or dependent care expenses before the deadline. Some plans may offer a grace period or allow a small rollover, so check with your employer.

Adjust Your Tax Withholding

If you’ve experienced significant changes in income, family size, or deductions this year, you might need to update your tax withholding. Use the IRS Tax Withholding Estimator to ensure you’re not overpaying or underpaying taxes.

Plan for Required Minimum Distributions (RMDs)

If you’re over 73 (or 72, depending on your birth year), the IRS requires you to take RMDs from certain retirement accounts. Missing these distributions can result in steep penalties. Ensure you meet the deadline and calculate the correct amount.

Consider Estate and Gift Tax Strategies

The annual gift tax exclusion allows you to give up to $17,000 (2023) per recipient without incurring gift taxes. If you’re looking to reduce your taxable estate, this can be a valuable strategy. Consult with a financial advisor to ensure alignment with your estate planning goals.

Prepare for Upcoming Tax Law Changes

Tax laws are subject to change, and understanding how upcoming adjustments may affect you is essential. For instance:

  • Changes to standard deductions or tax brackets.
  • Expiring pandemic-era credits or relief programs.
  • New tax incentives for energy-efficient home upgrades or electric vehicles.

Staying informed about these developments can help you adjust your financial strategies.

Organize Your Documents for Filing

Gather all necessary documents in advance to streamline the filing process:

  • W-2s, 1099s, and other income statements.
  • Receipts for deductible expenses and charitable contributions.
  • Statements for retirement account contributions and distributions.
  • Records of health insurance coverage.

Organizing your paperwork now will save you headaches during tax season.

Looking Ahead to Next Year

End-of-year preparation is more than a checklist; it’s a chance to align your financial strategies with your long-term goals. Regularly reviewing your financial situation, seeking advice from tax professionals, like those at SDK, and staying ahead of deadlines can make a significant difference.

As you gear up for the new year, remember that tax planning is a year-round activity. Setting a proactive tone now will not only lighten the load come April but also help you achieve greater financial clarity and success in the year ahead.