As 2024 draws to a close, the final months present several tax favored opportunities, that sunset. Now is an ideal time to review key areas in tax planning, charitable giving, and retirement contributions. Here’s a few high impact moves:
1. Evaluate Tax Thresholds and Bracket Management
Year-end is a strategic time to manage capital gains and losses, especially for taxpayers close to shifting into a higher bracket. By offsetting short term capital gains with losses or timing deductions, you might reduce your taxable income and optimize your rate. For example, if you’re nearing the $191,950 (single) or $383,900 (married, filing jointly) threshold, keeping income below these levels can spill over from the 24% to the 32% marginal tax bracket.
Similarly, if you are subject to the 3.8% Net Investment Income Tax (NIIT), applied to individuals with modified adjusted gross income over $200,000 (single) or $250,000 (MFJ), may benefit from managing gains to minimize exposure to this tax. For insights on NIIT and strategies to offset it, the IRS website provides guidance on thresholds and income types that trigger it.
2. Plan Charitable Contributions with Impact
If you are charitably inclined, consider “bunching” contributions. This strategy, involves clustering donations in a single tax year to surpass the standard deduction and make itemizing worthwhile. This can be especially impactful for sustainable-minded investors who contribute to environmental or social justice causes through donor-advised funds (DAFs). DAFs allow you to make a larger donation in one year and recommend grants to charities over time.
If you’ve already taken the standard deduction of $14,600 (single) or $29,200 (MFJ), bunching contributions can create a tax benefit in specific years.
And if you’re over 70½, you can make a Qualified Charitable Distribution (QCD) from your IRA, which is tax-free and reduces your adjusted gross income. The IRS’s guidelines on QCDs can provide further clarity.
3. Maximize Health Savings and Retirement Contributions
With rising healthcare costs, Health Savings Accounts (HSAs) have become popular for their triple tax benefit. You can contribute up to $4,150 for individuals or $8,300 for families in 2024, with an additional $1,000 for those over 55. HSAs grow tax-free and are an excellent way to prepare for healthcare expenses in retirement. Additionally, HSAs can be invested, allowing growth similar to traditional retirement accounts, which adds another layer of potential.
For retirement contributions, max out employer plans like 401(k)s, with a cap of $23,000, or $30,500 if you’re over 50. Roth accounts might be especially beneficial if you expect higher taxes in retirement, as contributions grow tax-free. If you’re interested in the balance between traditional and Roth 401(k) accounts, check out my previous insights on tax-diversified retirement strategies on Forbes.
4. Address Required Minimum Distributions (RMDs)
If you’re over 73 and have an IRA or 401(k), remember that Required Minimum Distributions (RMDs) must be withdrawn by December 31. Missing an RMD incurs a steep penalty, but you can often aggregate RMDs across IRAs (though not for inherited IRAs). Understanding RMDs can be crucial, especially for those with multiple accounts or beneficiaries—take a look at this IRS update on RMD rules. Inherited IRAs follow different rules and don’t allow aggregation with other IRAs.
5. Sustainable Investing: Review ESG and Impact Investments
Year-end is also a great time to evaluate the sustainability performance of your investments. With increasing regulatory attention to Environmental, Social, and Governance (ESG) disclosures, you can review how well your assets align with your values. Sustainable funds, particularly those targeting clean energy or fair labor practices, have become popular. Ensuring that ESG criteria match your standards involves examining fund holdings and their environmental impact.
In a recent article, I noted that sustainable investing goes beyond returns—it’s about value alignment. “Aligning with causes that matter to you, like sustainability, can add personal meaning to your financial goals,” I emphasized online resources like As You Sow’s Invest Your Values can assist in assessing the impact of your current holdings.
6. Optimize Your Flexible Spending Account (FSA) Balance
Flexible Spending Accounts (FSAs) are “use-it-or-lose-it” funds, so check with your employer to confirm deadlines. You can only use the amount that you committed to during your company’s open enrollment. For those who met their annual deductible, it may make sense to schedule other healthcare expenses before the end of the year to maximize FSA benefits. Find more guidance on the HealthCare.gov website, which includes details on FSA limits and rollover rules.
All may not be lost as your employer may allow up to $640 of unused funds to be rolled over during a grace period until March 15 to spend remaining balances.
7. Plan for College Funding
If you have a 529 education savings plan, you can contribute up to $18,000 annually for each beneficiary, tax-free. By the way, this is not restricted to parents. That amount doubles if you are married. For a substantial impact, consider lump-sum contributions, which allow up to $90,000 in one year without incurring gift taxes (by treating it as if made over five years). Recent changes also allow limited rollovers of unused 529 funds into a beneficiary’s Roth IRA, making 529 plans even more flexible. For more on 529s and recent changes, refer to the Tax Benefits for Education from IRS.gov.
Final Thoughts
With tax efficiency, charity and education savings top of mind, these steps can support a strong finish to 2024. Staying informed and proactive with finances, whether it’s improving tax strategies, boosting contributions, or aligning investments with values, empowers you to achieve your financial goals responsibly. By integrating these year-end actions, you’re not only enhancing financial health but also reinforcing a commitment to meaningful impact.