As December 31 approaches, it’s crucial for high-income earners to reflect on year-end tax planning strategies. With the potential for tax changes on the horizon in 2024, now is the perfect time to ensure you’re maximizing your savings and securing your family’s financial future. Read on for straightforward, actionable strategies tailored to help you navigate the complexities of year-end tax planning effectively.
Maximize Retirement Account Contributions
One of the most effective ways to reduce your taxable income is by maximizing contributions to your retirement accounts. For those with a 401(k), the contribution limit for 2024 has increased to $23,000. If you’re 50 or older, you can also make an additional catch-up contribution of $7,500. If your employer offers a 401(k) match, make sure you’re contributing enough to take full advantage of that free money.
If you don’t have a 401(k), you can still potentially reduce your taxable income by contributing to an Individual Retirement Account (IRA). The contribution limit for a traditional IRA in 2024 is $7,000, plus an additional $1,000 catch-up contribution if you’re 50 or older.
A Traditional IRA versus a Roth IRA
You can contribute to both a traditional IRA and a Roth IRA this year, but the combined limit remains the same – $7,000 (or $8,000 with the catch-up for those 50+). However, these two types of accounts have different tax benefits:
- Traditional IRA contributions may be tax-deductible, which can lower your taxable income for this year.
- Roth IRA contributions are not tax-deductible, but your withdrawals during retirement will be tax-free.
The key difference is whether you want the tax break now (traditional IRA) or later in retirement (Roth IRA).
Income Limits for Roth IRA Contributions
If your income is too high to contribute directly to a Roth IRA, you can consider a backdoor Roth IRA strategy. This involves contributing to a traditional IRA and then converting those funds to a Roth IRA. While you’ll potentially pay taxes on the conversion now, you’ll benefit from tax-free withdrawals during retirement.
Tax-Loss Harvesting
Another effective strategy for high-income earners is tax-loss harvesting. This involves selling investments that are currently at a loss to offset taxable gains, which can help lower your tax bill. If losses exceed taxable gains, then it’s possible to deduct up to $3k of losses against other sources of income. Review your investment portfolio to identify any losing positions you may want to sell. Just be mindful of wash sale rules, which disallow loss deductions if you repurchase the same security within 30 days. Planning your trades wisely can maximize your tax benefits.
Charitable Giving Strategies
If giving back is important to you, consider incorporating charitable strategies into your year-end tax planning. Donor-Advised Funds (DAFs) allow you to make charitable contributions while maintaining control over the timing of distributions, enabling you to take an immediate tax deduction. If you have highly appreciated investment holdings in a non-retirement account, it’s possible to donate those shares directly to the DAF. This allows you to get the current market value of the holding as a deduction, but also avoid paying capital gain on the holding.
Additionally, if you typically donate annually, think about bunching your contributions into one year. This strategy can help you exceed the standard deduction threshold, maximizing your tax benefits.
Defer Income and Accelerate Deductions
For business owners and self-employed individuals, deferring income can be a smart move. If possible, delay invoicing until January, which can lower your tax liability for the current year. Consider prepaying deductible expenses, such as office supplies or subscriptions, to increase your deductions this tax year.
If you are a W2 employee, some employers offer deferred compensation plans, allowing you to defer a portion of your salary until a later date, typically retirement. These plans are offered in addition to 401(k) options.
Another effective strategy is to negotiate year-end bonuses for January, allowing you to defer tax liability until the next year.
Review and Adjust Estimated Tax Payments
As a high-income earner, it’s essential to avoid underpayment penalties, especially as the year comes to a close. Review your income to determine if your estimated tax payments need adjusting for Q4. If you anticipate a lower tax liability, consider reducing your final estimated payment to avoid overpaying.
Maximize Health Savings Account (HSA) Contributions
Health Savings Accounts (HSAs) offer a fantastic tax advantage. For 2024, the contribution limits are $3,850 for individuals and $7,750 for families. If you’re 55 or older, you can contribute an additional $1,000. HSAs provide a triple tax benefit: contributions are tax-deductible, the account grows tax-free, and withdrawals for qualified medical expenses are also tax-free.
Review Your Investment Portfolio
As the year winds down, it’s a good time to review your investment portfolio. Implement tax-efficient asset location strategies by placing tax-inefficient investments in tax-advantaged accounts, like IRAs. Additionally, consider rebalancing your portfolio to maintain your desired asset allocation, optimizing tax efficiency in the process.
Conclusion
In conclusion, year-end tax planning is essential for high-income earners like you. By maximizing retirement contributions, utilizing tax-loss harvesting, and exploring charitable giving strategies, you can effectively reduce your tax burden while securing your financial future. Remember, consulting with a tax professional can help you make the most of these strategies and adapt to any potential tax law changes in 2024. Taking proactive steps today can lead to significant savings tomorrow, ensuring you’re well-prepared as the new year approaches.
If you or someone you know needs personalized guidance, consider setting up a call with KFA Private Wealth Group.
Our advisors, who are both CPAs and tax experts, can help you navigate the complexities of year-end tax planning effectively to meet your financial goals.
The opinions expressed herein are those of KFA Private Wealth Group (“KFA”) and are subject to change without notice. KFA reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This should not be considered investment advice or an offer to sell any product. Past performance is no guarantee of future results. This contains forecasts, estimates, beliefs and/or similar information (“forward looking information”). Forward looking information is subject to inherent uncertainties and qualifications and is based on numerous assumptions, in each case whether or not identified herein. It is provided for informational purposes only and should not be considered a recommendation to buy or sell securities or a guarantee of future results. KFA is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about KFA, including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.
