A Guide for End-of-Year Tax Planning

Strategies for Tax Preparation and Planning

End-of-year tax planning is an essential process to help you reduce your tax burden and optimize your financial strategy for the coming year.

Below are some end-of-year tax planning strategies to help you prepare successfully:

Review Your Tax Situation

Before taking any action, the first step in end-of-year tax planning is to review your current tax situation. You should understand where you stand in terms of your tax bracket, income, deductions, and credits.

Key Considerations

Income Level: Your taxable income plays a crucial role in determining how much you owe. Income can come from multiple sources, including wages, self-employment, investments, or retirement distributions. Make sure you’re accounting for all of your sources of income.
Tax Bracket: The U.S. has a progressive tax system, which means that different portions of your income are taxed at different rates. Understanding where your income falls within these brackets will help you decide on effective tax-saving strategies.
Filing Status: Your filing status (single, married, filing jointly, head of household, etc.) can affect your tax rate and eligibility for certain deductions and credits.

Consider Tax Code Changes for Your Industry

In recent years, various tax code changes have impacted industries like restaurants, real estate, construction, and law firms, offering both challenges and opportunities.

Restaurants

For restaurants, the IRS introduced expanded deductions for business meals, allowing them to deduct 100% of the cost of food and beverages provided by restaurants in 2021 and 2022 as part of COVID-19 relief measures, though this may revert to 50% in subsequent years.

Real Estate

Real estate professionals benefit from tax incentives such as the 1031 exchange, which allows the deferral of capital gains taxes when reinvesting in like-kind properties, and bonus depreciation for property improvements.

Construction

In construction, Section 179 spending allows for immediate deductions on qualifying equipment, and new rules for the taxation of contractors can significantly impact project profitability.

Law Firms

For law firms, the Qualified Business Income (QBI) deduction provides a 20% tax deduction on eligible pass-through income, but changes to this deduction, along with potential adjustments to state and local tax (SALT) limitations, may affect firm owners’ tax strategies.

Learn how accounting for construction businesses can enhance project success and profitability.

Learn More

Maximize Retirement Contributions

Contributing to retirement accounts can be an excellent way to reduce your taxable income.

In 2024, the contribution limits for retirement accounts like 401(k)s, traditional IRAs, and Roth IRAs are as follows:

401(k) or 403(b)

You can contribute up to $22,500 for individuals under 50 and $30,000 for those 50 and older (including catch-up contributions). Contributions to these plans are made pre-tax, reducing your taxable income.

Traditional IRA

The contribution limit for traditional IRAs is $6,500 for individuals under 50 and $7,500 for those 50 and older. Contributions to traditional IRAs may be deductible, depending on your income and filing status.

Roth IRA

While Roth IRA contributions are not tax-deductible, they offer tax-free growth and withdrawals in retirement. The eligibility for contributing to a Roth IRA is based on income limits.

Even if you’re self-employed, options like SEP IRAs and Solo 401(k)s can help you contribute large amounts to your retirement and lower your taxable income.

Contribute to Health Savings Accounts (HSAs)

For those who have a high-deductible health plan (HDHP), contributing to a Health Savings Account (HSA) is an effective way to reduce taxable income. Contributions to an HSA are tax-deductible, and the funds can be used tax-free for qualified medical expenses. Furthermore, HSAs have a unique benefit: the funds roll over year after year, and you can continue to grow them tax-free for future medical needs.

For 2024, the HSA contribution limits are:

Self-only coverage: $4,150
Family coverage: $8,300

If you’re 55 or older, you can make an additional $1,000 catch-up contribution.

Harvest Tax Losses

Tax-loss harvesting is a strategy that involves selling investments that have lost value in order to offset any gains you may have realized earlier in the year. This can help you minimize your capital gains taxes. If your losses exceed your gains, you can also use up to $3,000 of net capital losses to offset ordinary income. Any losses beyond that amount can be carried over to future years.

For example, if you have significant gains in your stock portfolio, you could sell some losing positions to reduce the overall taxable gain. Keep in mind that the IRS has rules to prevent you from immediately repurchasing the same or substantially identical investments (known as the “wash-sale rule”).

Consider Charitable Contributions

If you itemize deductions, charitable contributions can be a great way to reduce your taxable income. Donations to qualified charitable organizations are deductible up to certain limits based on your adjusted gross income (AGI).

You don’t need to donate only in cash—non-cash gifts such as clothing, household items, or appreciated securities (like stocks) can also be deductible. Donating appreciated stocks, for example, allows you to avoid paying capital gains taxes on those gains, and you can deduct the fair market value of the stock on the day of donation.

If you’re over 70½, you may also consider making a Qualified Charitable Distribution (QCD) directly from your IRA to a charity. QCDs count toward your required minimum distribution (RMD), but they aren’t included in your taxable income.

Plan for Required Minimum Distributions (RMDs)

Starting at age 73 (as of 2024), retirees are required to begin withdrawing a minimum amount from their traditional IRAs, 401(k)s, and other tax-deferred retirement accounts each year. These withdrawals, called Required Minimum Distributions (RMDs), are taxable.

You can plan for RMDs by considering strategies to reduce the impact on your taxes:

Timing: If you don’t need the money immediately, you might want to consider spreading out your RMDs to avoid entering a higher tax bracket.
Charitable Contributions: As mentioned, a QCD can help you meet your RMD requirement while lowering your taxable income.

Review Tax Deductions and Credits

Tax deductions and credits can significantly reduce your tax bill. At the end of the year, it’s a good idea to review your eligibility for various tax benefits.

Deductions

Mortgage Interest: If you itemize, mortgage interest on your primary home is deductible.
State and Local Taxes: You can deduct up to $10,000 in state and local taxes (SALT) paid, including property taxes and state income or sales taxes.
Student Loan Interest: You may be able to deduct up to $2,500 of student loan interest, depending on your income level.

Credits

Child Tax Credit: If you have dependents, the child tax credit can reduce your tax bill by up to $2,000 per qualifying child.
Earned Income Tax Credit (EITC): This is a refundable credit that can benefit lower-income individuals and families.
Energy-Efficient Home Improvements: If you qualify for energy-efficient improvements, you may be eligible for credits such as Residential Energy-Efficient Property Credit.

Consider Deferring Income

If you have control over the timing of income, such as self-employed individuals, business owners, or freelancers, deferring income to the following year may help you stay in a lower tax bracket. For example, if you expect to be in a lower tax bracket next year, consider delaying sending out invoices or deferring payments until the next year.

However, be mindful of the “constructive receipt” rule, which means that once income is made available to you, it’s considered received for tax purposes, even if you don’t actually receive it until later.

Plan for Business Tax Savings

If you’re a business owner, there are numerous tax-saving strategies available at year-end. These can include:

Section 179 Deductions: The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment, up to a certain limit, in the year the purchase is made. The deduction limit for 2024 is $1,160,000, with a phase-out threshold of $2.89 million.
Bonus Depreciation: Businesses can take advantage of bonus depreciation, allowing you to deduct a significant portion of the cost of qualifying assets in the year they are purchased.
Qualified Business Income Deduction (QBI): If you’re a pass-through entity (such as an LLC, S-corp, or partnership), you may be eligible for a deduction of up to 20% of your qualified business income, subject to certain limitations.

Consult with a Tax Professional

Tax laws are ever-changing, and end-of-year planning can be complex. Consulting with a tax professional, especially if you have significant income, investments, or business interests, is a good way to ensure you’re making the most of your tax-saving opportunities. A tax advisor can help you implement strategies tailored to your specific financial situation and make sure you’re compliant with the latest tax laws.

Year-End Tax Planning Checklist

Review Income and Tax Bracket: Estimate total income and determine your tax bracket.
Maximize Retirement Contributions: Contribute to 401(k), IRA, or other accounts.
Utilize Tax-Advantaged Accounts: Fund HSAs or FSAs if eligible.
Harvest Tax Losses: Sell investments to offset capital gains.
Make Charitable Donations: Donate to qualified charities for deductions.
Consider Timing of Income and Deductions: Defer income or accelerate expenses.
Claim Tax Credits: Ensure you’re using credits like the Child Tax Credit.
Plan for RMDs: Meet the required minimum distributions if you’re over 73.
Review Business Deductions: Ensure all business expenses are deducted.
Consult a Tax Professional: Meet with an advisor to optimize your tax strategy.

Count on Swick & Associates to Take Care of Tax Planning for Your Small Business

Count on Swick & Associates to handle all your small business tax planning needs with expertise and precision. Our team is dedicated to helping you navigate complex tax laws, maximize deductions, and minimize liabilities. Whether it’s optimizing retirement contributions, ensuring compliance with tax regulations, or strategizing on business expenses and credits, we tailor our services to fit your unique needs. With Swick & Associates’ end-of-year tax planning services, you can focus on growing your business while we take care of your tax prep, helping you save time and money throughout the year. Let’s talk today!