Year-end Tax Planning Moves For Individuals
During the holiday season, income taxes probably aren’t top of mind for most taxpayers. But along with the festivities, it’s a good time to consider tax strategies that may reduce this year’s taxes, and possibly future years’ taxes as well. Here are three tax planning moves that might trim the waste off your 2024 taxes.
1. Donate stock to charities
If you itemize deductions and want to donate to IRS-approved public charities, you can combine your generosity with a revamping of your taxable investment portfolio. Here are some tax-smart principles to follow:
Sell underperforming stocks and donate the proceeds. Stocks worth less than they cost can be sold at a tax-saving capital loss. You can then donate the sales proceeds to charity and claim a charitable deduction.
Donate appreciated stocks. If you’ve held a stock for over a year and donate it to charity, you can claim a deduction for its market value while avoiding capital gains tax you’d owe if you sold it. Stocks held for less than a year can also be donated, but the deduction is limited to cost basis.
2. Prepay higher education bills
If you paid higher education expenses for you, your spouse or a dependent, you may qualify you for one of the following credits:
The American Opportunity credit. This credit is equal to 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000, for the first four years of postsecondary education in pursuit of a degree or recognized credential. The maximum annual credit is $2,500 per qualified student.
The Lifetime Learning credit. This credit is equal to 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000 per tax return.
For 2024, both credits phase out if your modified adjusted gross income (MAGI) is between:
$80,000 and $90,000 for unmarried people, or
$160,000 and $180,000 for married couples filing jointly.
Various other restrictions also apply. If you’re eligible for either credit and your 2024 expenses don’t already exceed the applicable limit, consider prepaying college tuition for academic periods from January through March 2025.
If your credit will be partially or fully phased out because of your MAGI for 2024, consider whether there’s anything you could do to reduce your MAGI so you could maximize your 2024 education credit. (Reducing your MAGI could also increase the benefit of certain other tax breaks.)
3. Consider a Roth conversion
If you anticipate being in a higher tax bracket during retirement than you are now and have a traditional IRA, consider a Roth conversion. The downside is that this will generate a current tax cost. Why? Because a conversion is considered a taxable liquidation, followed by a nondeductible contribution to a Roth account. However, post-Roth conversion, all qualified withdrawals from the account will be federal-income-tax-free. Qualified withdrawals occur after:
The Roth account has been open for over five years, and
You’ve reached age 59½, become disabled, or passed away (withdrawals made to a beneficiary).
A Roth conversion makes it possible to avoid potentially higher future tax rates, because you’ve already paid the tax.
For more ideas
Federal tax law may be uncertain for the next year or so because many of the Tax Cuts and Jobs Act provisions are scheduled to expire at the end of 2025 but could be extended. There also could be other tax law changes as a result of the election. Contact the office to discuss tax planning moves that may work for you.