Anyone who has filed taxes before knows that your typical tax year runs from January 1 to April 15th of the following year. In the four months following the close of the calendar year, there are certain tax strategies that can be applied to the prior year. The opportunities for year-end tax planning are due by December 31st.

There are certain actions that must be completed within the calendar year to impact your taxes.

There are also adjustments you can make up until the tax filing deadline to optimize your tax situation.

For example, you have the option to contribute to an IRA for the prior tax year up until the tax filing deadline. This can be a smart strategy because it allows you to assess your tax situation after the year ends and potentially reduce your taxable income.

By making contributions after ‘the dust has settled,’ you can lower your tax liability and maximize savings for retirement.

However, not everything can be done up until the tax deadline and must be completed in the calendar year.

Six common planning items include:

401(k)/403(b)/457 plan contributions (employer-sponsored plans)
Roth conversions
Required Minimum Distributions (RMDs)
Charitable contributions
Tax-loss & Tax-gain harvesting
Gifting strategy (annual exclusion gifts)

Let’s briefly cover each of these and how you can make sure things are done prior to the year-end deadline.

401(k)/403(b)/457 Plan Contributions

If you are contributing to one of these employer-sponsored retirement plans, you must contribute in the calendar year for it to count for the tax year. Unlike IRA contributions, you cannot make a prior year contribution up until April of the following year. Therefore, it should be part of your year-end tax planning.

While 401(k) contributions aid in the growth of your retirement accounts, one of the major benefits of pre-tax 401(k) contributions is the lowering of the Modified Adjusted Gross Income.

This is a benefit in that it could keep you in a lower tax bracket. But it could also qualify you for certain credits & deductions you wouldn’t have otherwise qualified for.

Roth Conversions

We’ve covered Roth Conversions extensively in prior posts & videos, but we’ve also discussed why they need to be completed for year-end tax planning.

The challenge is predicting how much income an individual brings in.

Our team usually waits until year-end, when we have a good projection on an individual’s income for that year. This allows us to determine how much (if any) of a Roth Conversion we should consider.

An exception to this would be if there is a sudden market drop throughout the year, in which a Roth Conversion could be a prudent move (move from pre-tax to post-tax at a market “low”).

When completing a Roth Conversion, you should be cognizant of the other effects it could have on your plan, such as your Marginal Ordinary Income Tax Brackets, Capital Gains Thresholds, Medicare Premium Surcharges, Taxation of Social Security benefits, and loss of potential tax credits.

Required Minimum Distributions

Depending on your DOB and if you own a pre-tax retirement account, you may be subject to Required Minimum Distributions. Therefore, completing these in the calendar year is essential.

The good news is you can calculate what your Required Minimum Distribution will be on December 31st of the year prior, so there is ample time to complete this.

There is an exception if it’s your first year collecting an RMD, you have until April 1 of the following year to collect. Therefore, for one year (your first year collecting an RMD), you have a few months beyond the standard 12/31 deadline.

If you fail to take out an RMD, the penalty is 25% of the amount you should have taken out. But it can be reduced to 10% if corrected promptly.

Charitable Contributions

Charitable contributions are considered the year in which they are made. As a result, there are some things you want to consider.

Determining Standard v Itemized Deduction

While this is part of a larger tax plan, if you’re planning to utilize the standard deduction, then the charitable donations don’t necessarily need to be planned or accounted for.

However, if you’re itemizing your deductions, you’re eligible to deduct qualified charitable contributions up to 60% of your adjusted gross income (if this is a cash contribution).

For non-cash donations (such as appreciated stock), you can deduct up to 30% of your AGI.

Keep in mind, you can carry the excess over a 5 year time period if you exceed these thresholds.

Qualified Charitable Distributions

If you’re charitably inclined and are currently receiving a RMD (referenced above), you may want to consider a Qualified Charitable Distribution (QCD).

This will allow you to donate a portion (or all) of the income you have received directly to charity, and you’re able to deduct this from your taxable income. This can be especially helpful if your RMD pushes you into a higher tax bracket than it may have otherwise.

This must be reported separately the next year when filing your taxes though. The custodian who handles your QCD will not report it as such.

Donor Advised Funds

A donor-advised fund (DAF) can allow you to plan charitable contributions over time. But the real benefit is enjoying the benefits of a tax write-off in one year.

Essentially, the contribution to the Donor-Advised Fund is a front-loaded contribution which can grow over time. The funds are earmarked for charities, so the benefit is recognized in the year in which you make the contribution.

Contributions to a DAF are typically invested, allowing the balance to grow tax-free. This means your charitable dollars can potentially increase in value through investment returns.

It can also allow you to make a more significant impact with future disbursements to the causes you care about.

Tax-Loss & Tax-Gain Harvesting

Tax Gain Harvesting

For retirees who can vary their sources of income, tax-gain harvesting may make sense. Since long-term capital gains are taxed at different rates than ordinary income, it may make sense to recognize long-term gains when tax brackets allow.

For example, if significant long-term capital gains make up the only income an individual or couple realizes in a given year, it could allow the individual to pay a 0% capital gains tax rate on federal income.

Example

MFJ Couple Fred & Joan Harris (both over the age of 65) recognize $126,050 of a long-term capital gain in 2024. This is the only income received by the Harris family.

When accounting for both the standard deduction & the MFJ capital gains tax bracket, this is all received federal income tax free.

Example 2

Stanley & Cynthia Hudson also have an identical situation to the Harris family. However, the Hudson’s take out a $32,300 IRA withdrawal. In addition, they take a $94,050 long term capital gain in 2024.

The Hudson’s also have a $0 tax bill due. They have filled their long-term capital gains bracket.

They also have the ordinary income from the IRA distribution covered by the standard deduction.

Example 3

Earvin & Cookie Johnson fit the same demographic, but have a $40,000 IRA withdrawal and $100k long term capital gain. The first $32,300 of ordinary income is accounted for by the standard deduction. But the remaining $7,700 of the ordinary income is taxed at the 10% rate.

The long-term gain is then taxed after the bracket has been filled leaving a taxable long-term capital gain of $8,000 at the 15% rate.

As a result, the Johnson’s have to pay $1970 of federal tax on their total 2024 income.

Tax-Loss Harvesting

For non-qualified accounts that may have a loss within a certain fund, it could make sense to offset some of the losses & gains as part of your year-end tax planning.

Being that you can offset a gain you would have otherwise had to have paid long-term capital gains tax on, by selling another asset at a loss, you can offset the two assets, thus resetting your cost basis within those funds.

One catch is to void a wash sale. You cannot deduct losses if you repurchase the same or substantially identical securities within 30 days before or after the sale. It’s a better strategy to buy a similar security if you’re planning to do this.

Gifting Strategies

If planning gifts to another individual, in 2024, you can give up to $18,000 per donor, per beneficiary without any IRS reporting requirements. Again, this needs to be done within the calendar year in order to qualify. Married couples may give double this amount.

There could be a variety of reasons why someone would want to give up to the annual limit. But if you’d like to make sure the gift requires no reporting, you must stay within the annual limit.

Conclusion

Making sure you understand the difference of the calendar year deadlines & tax year deadlines are critical to your year-end tax planning. As the calendar year begins to wrap up, make sure your plan is properly accounted for. Additional adjustments can be made up until April the following calendar year. But completing the required actions by year end will allow you to prioritize accordingly.