End-of-Year Tax Planning: Seven Need-to-Know Tips

Although the filing season typically starts in late January, it can be highly beneficial to address key tax decisions before the year draws to a close. Effective planning now can reduce your overall tax burden for the upcoming filing period and help you to maximize your savings over the long haul. With important deadlines slated for the end of the year, now is an opportune time to ensure you have these seven essential tax-planning considerations on your radar:

Do not overlook the value that your “adjustments to income” provide in reducing your total tax burden.

The IRS allows you to reduce your taxable income with certain expenses and payments that you do not have to itemize — they are officially known as adjustments to income. Often referred to as “above-the-line deductions,” you can take them even if you claim the standard deduction. The phrase “above-the-line” describes their location on Form 1040 of your tax return, above the line that contains your adjusted gross income (AGI). Before you calculate your AGI, you subtract these above-the-line deductions from your gross income.

Critically, adjustments to income can favorably impact your eligibility for additional deductions or credits. For example, you can only use the portion of unreimbursed medical expenses that exceed 7.5% of your AGI as an itemized deduction. By claiming above-the-line adjustments that reduce your AGI, you can deduct more of your out-of-pocket medical expenses.

As explained by AARP in “Above-the-Line Deductions Anyone Can Take,” the Schedule 1 worksheet is used to calculate many of your adjustments to income. Some common above-the-line deductions include but are not limited to qualifying student loan interest payments, educator expenses, qualifying alimony payments, contributions to a traditional individual retirement plan (IRA), and self-employed health insurance premiums.
 
Review changes to the standard deduction and income tax brackets for the new tax year.

The government does not expect you to pay taxes on all your income, which is a major reason the standard deduction exists. As a refresh, the standard deduction is a specific dollar amount that reduces the amount of income on which you are taxed. Most taxpayers qualify for the standard deduction, and it often makes good sense to claim it unless you have a considerable amount of expenses you can deduct. However, you cannot take the standard deduction and itemize deductions in the same tax year. 

The IRS typically adjusts the standard deduction upward annually to account for inflation, as they have for 2024. Find the 2024 standard deductions for your tax filing status as well as the income threshold for the various tax rates here. While the seven tax bracket rates have not changed since 2023, the government has expanded the amount of taxable income in each tier. To illustrate, a single filer with $191,950 in taxable income would be at the 24% tax rate in 2024, whereas this same amount would have meant a 32% rate in 2023.

Consider whether you will itemize or take the standard deduction. 

About 90 percent of U.S. taxpayers claim the standard deduction on their filings these days, but that does not necessarily mean it’s the best option for you. Certainly, the standard deduction saves time and hassle in compiling and organization various expenses. and keeping records and receipts. But if the value of your itemized deductions you are entitled to take is higher than the standard deduction, itemizing can either reduce what you owe or maximize a potential refund. 

Typical reasons taxpayers may choose to itemize are the allowable deductions for mortgage interest, out-of-pocket medical or dental expenses, and charitable contributions. Deductions related to being self-employed or a business owner can also potentially make itemizing the best option. The federal tax deduction for property, state and local income taxes is another large deduction that can impact your decision. You can find a helpful explanation of “22 Popular Tax Deductions and Tax Breaks for 2024” at NerdWallet. Working with a qualified tax professional like a certified public accountant (CPA) or enrolled agent (EA) can help you determine which option would provide you with the most savings.

Make contributions to your employer-sponsored retirement plan.

Because contributions to employer-sponsored retirement plans like 401(k) plans and most other salary-deferred plans are processed through payroll deductions, you typically must make them by the end of the calendar year. This December 31 deadline applies to traditional 401(k) plans, Roth 401(k) plans, and 403(b) plans. 

Many employers will match some portion of your contributions to their plan, which essentially amounts to free money for you. If your employer offers matching contributions, it is usually advisable to contribute at least enough to get the maximum match amount. Of course, another compelling reason to contribute to a retirement plan is that it allows your money to grow through compounded earnings over decades in a tax-efficient way. 

Both traditional retirement plans and Roth options offer unique tax advantages — and a qualified financial planner or tax advisor can steer you toward the best course of action for you. In some cases, your best option may be to invest enough in your employer-sponsored retirement plan to get the full contribution match, and then to investigate other tax-advantaged instruments such as a traditional or Roth IRA before making additional contributions to your workplace plan. Unlike 401(k) plans, contributions to tax-advantaged savings accounts like individual retirement accounts (IRAs) and health savings accounts (HSAs) can be made up until the Tax Day (April 15) for the year you are making the contribution.

Spend any funds that you have left in your flexible spending account.

If you have been contributing to a flexible spending account (FSA) offered through an employer, now is the time to ensure that you spend it down. An FSA allows you to reduce your taxable income by having pre-tax contributions deducted from your paycheck to cover qualified medical expenses or dependent care. Unlike a health savings account (HSA), the funds in a FSA typically don’t roll over from year to year.

Remember to take any required minimum distributions (RMDs).

To ensure that they collect taxes owed to the U.S. Treasury, the IRS requires that those with tax-deferred retirement plans like traditional 401(k)s and traditional IRAs start making withdrawals from these accounts each year beginning at age 73 (as of 2024).

Roth IRAs do not have these mandatory withdrawals unless you inherited the account, since you have already paid taxes on your contributions. In addition, Roth-designated workplace accounts no longer have required minimum distributions (RMDs) as of 2024.

If you are required to withdraw from a retirement account this year, do so before the December 31 deadline to avoid the 25% penalty on the amount not withdrawn on time. Those born in 1951 have an additional few months but must take the first required minimum distribution by April 1, 2025. For help on compliance including how to calculate RMDs, see “What is a Required Minimum Distribution (RMD)?" from TaxSlayer. But be sure to consult your tax advisor if you have questions.

Make charitable donations before December wraps up.

Charitable donations can help lower your tax bill if you ensure that you contribute to a qualified organization and you itemize your deductions on Schedule A of your tax form. You can potentially write off gifts of cash, property (e.g., clothing, real estate, cars), and stock, but you cannot deduct contributions made to specific people or political organizations and candidates. The maximum you can deduct for a qualified charitable contribution is 60% of your adjusted gross income, but this percentage may be less depending on what you donate and the organization that receives it. 

To be certain, tax planning is a complex subject that calls for much more than a short checklist of items to complete by December 31. Most people benefit from consulting a trusted financial professional who can offer an integrated approach based on the individual’s unique goals and financial situation. Ultimately, tax planning is an essential component of a comprehensive financial plan, and it should address both your immediate needs and offer a solid long-term strategy to build and preserve wealth for yourself and future generations.

The Police Credit Union does not provide Tax, Legal or Accounting advice. Members should seek their own professional counsel in these matters.