Maximize Your 2024 Tax Savings with Smart Year-End Planning

No one wants to pay more in taxes, but many people do through errors of omission each year. As we begin the 4th quarter of 2024, here are a few easy ways that you might be able to better your tax situation, either today or in the future. Once December 31st comes and goes, it is too late to capture these benefits. So, explore your options today!

Max out Your Workplace Retirement Plans.

If you are not maxing out your 401k, you may be missing the simplest way to reduce what you owe in taxes. For 2024, the 401(k) deferral limit is $23,000 if you are under 50 and is $30,500 if you are 50 or older. 

If you choose to make pre-tax contributions, then you will reduce your taxable income by the amount you contribute. This will lower your current year tax bill. If you make Roth contributions, you will pay tax now on the amount contributed, but will not be taxed later in life when you begin taking distributions. 

It isn’t uncommon for folks to think they are maxing out their 401(k) only to realize, at some point, that this isn't the case. This often happens after a job or compensation change. Folks are so busy with the hustle and bustle of a new job that they forget to set up their 401k contributions correctly. 

To see if you are on track to max out your 401(k), look at your paystub for your year-to-date contributions, or login to your 401(k) investment provider’s website. If it doesn’t look like your remaining contributions for 2024 will get you to the max, there is still time to adjust. All you need to do is reach out to your payroll department and ask how you can adjust your contributions to meet the maximum contribution by year-end. 

You also won't want to forget about supplemental plans. For example, you may have access to a 457 if you work for a governmental or non-profit organization. It is incredibly common for folks to maximize their 401(k) contributions but be totally unaware they have access to another plan that allows an equal dollar amount of tax advantaged contributions! 

Your employer might even go beyond these options and provide features like the mega backdoor Roth or a 401(a). The right combination of employer plan options can create the ability to save six figures into tax advantaged investment accounts! 

Make a Backdoor Roth Contribution

If you are not familiar with the term “backdoor Roth” and make over $146,000/yr, you need to get familiar! The backdoor Roth is still an all-too-commonly missed opportunity by those whose income is over the limits for a direct Roth contribution. 

Rather than go into all the details here, I recommend you check out my prior blog post where I deep dive into this and other Roth contribution strategies for high earners. While the limits for the backdoor Roth are relatively low (this isn’t the case for the mega backdoor Roth), it is ultimately a way to get tax free growth on money that you otherwise would have invested in your brokerage account.

Estimate Your Current Year Tax Liability and Determine if There are any Tactical Tax Moves to Make Before Year-End

If you are waiting until April 15th to figure out what you owe in taxes, you're doing it wrong. Most actions that can be taken to reduce your tax liability must be completed by December 31st. If you wait until it's time to file your tax return to evaluate tax strategies, you are too late! 

I generally suggest running a tax projection in October or November to give yourself plenty of lead time to implement any changes before year end. I do this every year for clients with the help of some sophisticated software, but a good resource for creating your own, rough tax estimate is this simple calculator on smartasset.com. While it won’t account for itemized deductions or lots of other tax preference items, it will at least help you get a ballpark idea of where you stand. 

This type of planning is particularly helpful in abnormally high income years. If, for example, you received a large bonus or had an unusually large amount of equity compensation in a year, you might find that your forecasted tax withholding is dramatically less than your forecasted liability. Absent timely quarterly tax payments, you may find yourself faced with tax penalties! All of this can be simplified and avoided with a few simple steps throughout the year.

Tax Loss Harvest Your Brokerage Account

Seeing negative returns in your investment account is never fun, but many folks miss the opportunity to turn this loss into a benefit. Tax loss harvesting is the process of selling stocks, mutual funds, or ETFs in your brokerage account at a loss to offset current or future realized gains. 

The most important thing to remember when implementing a tax loss harvesting strategy is that losses have an unlimited carry forward. This means that you don’t need to use them up in the year that they are realized, and can carry them forward to when you most need them most. 

While I suggest an ongoing tax loss harvesting program that realizes losses throughout the year, at a minimum you should be looking at your portfolio towards the end of the year to see what opportunities you may be missing out on. 

Make Charitable Donations (but make sure they make a difference)

While most of us give out of generosity, the potential tax savings created through charitable giving can be a cherry on top. However, most people make a massive mistake when navigating this piece of their tax strategy - they don’t give enough to actually get a tax benefit! 

Charitable gifts are itemized deductions. As such, they are only able to be deducted if you itemize your deductions in the first place. The 2017 Tax Cuts and Jobs Act both increased the standard deduction and lowered certain itemized deductions in such a way that, for many taxpayers, the standard deduction was more advantageous for them. 

With this in mind, I often explore ways for clients to “bunch” gifts into a single year to get over the standard deduction threshold. One way to accomplish this is to give through a Donor Advised Fund (DAF) instead of giving directly to a charitable organization. While I won't go into the details of how a DAF works in this post, you can read more about them here in an article from Fidelity Charitable.

Summary

A little planning ahead can mean a lot of money back in your pocket. While tax planning might not be the most exciting financial planning topic to discuss, it is undoubtedly one of the most powerful planning tools in your toolbox. 

Like all other parts of your financial plan, your tax strategy should be viewed within the context of your entire financial life. When working with clients to create a tax strategy, we are not only looking at the current year benefits, but also the possible long term implications of certain tax payment or deferral decisions. To learn more about how I develop and implement these strategies for clients, schedule a call with me here!

Disclaimer: The information provided in this article is for educational purposes only. It does not constitute tax, legal, or investment advice. Prior to implementing any of the reference strategies, you should consult with your own tax, legal, and investment professional(s).