As the year comes to a close, it's time to start thinking about your taxes. Year-end tax strategies can make a significant difference in your financial health, allowing you to maximize savings and minimize liabilities. In this blog post, we'll explore practical strategies that everyone whether you're an individual, a small business owner, or a family, can implement before December 31. We'll also share real-world examples and advice to help you navigate this essential aspect of your finances.

Why Year-End Tax Strategies Matter

The tax code is filled with opportunities to save money, but many people miss out because they wait until tax season to think about their finances. Year-end tax strategies are crucial because they give you the chance to take advantage of deductions, credits, and other financial maneuvers before the tax year ends. Failing to plan can result in missed savings or higher tax bills.

Tips for Effective Year-End Tax Planning

1. Review Your Income and Expenses

As the year closes, take the time to review your income and expenses. This will help you determine how much taxable income you have for the year and identify any potential deductions.

• Example: Lisa, a freelance graphic designer, found that her income fluctuated throughout the year. By reviewing her income, she realized she could make additional contributions to her retirement account to lower her taxable income before the year ended.

2. Maximize Retirement Contributions

Contributing to retirement accounts can lower your taxable income and help you save for the future. If you have a traditional IRA or a 401(k), consider maximizing your contributions before the year ends.

• Contribution Limits: For 2024, the contribution limit for a 401(k) is $22,500 (or $30,000 if you're 50 or older). The limit for an IRA is $6,500 (or $7,500 if you're 50 or older).
• Example: John, a 45-year-old accountant, increased his 401(k) contributions in December to hit the maximum limit. This not only reduced his taxable income but also boosted his retirement savings.

3. Take Advantage of Tax Credits

Tax credits directly reduce your tax liability, making them more valuable than deductions. Research any credits you may qualify for, such as the Child Tax Credit, Earned Income Tax Credit, or education-related credits.

• Example: Maria, a single mother, learned about the Child Tax Credit while preparing for tax season. By claiming it, she reduced her tax bill significantly and received a refund that helped her cover holiday expenses.

4. Harvest Tax Losses

If you have investments that have lost value, consider selling them to realize the loss, which can offset gains from other investments. This strategy, known as tax-loss harvesting, can help reduce your tax burden.

• Example: Tom, an avid investor, noticed that some of his stocks had lost value. He sold those shares before year-end, using the losses to offset gains from his other investments. This strategy reduced his overall tax liability.

5. Bunching Deductions

If you itemize deductions, consider “bunching” them in one year to exceed the standard deduction threshold. This involves timing your expenses, such as charitable donations or medical expenses, to maximize your deductible amounts.

• Example: Emily planned her charitable contributions and medical expenses for two years into one to take advantage of higher itemized deductions. By doing so, she was able to deduct more than if she spaced them out.

6. Make Charitable Donations

Charitable contributions not only support causes you care about but can also lower your taxable income. Ensure to keep track of your donations and obtain receipts for all contributions.

• Example: David decided to donate to his local food bank during the holiday season. He kept the receipt and deducted the amount on his tax return, reducing his taxable income.

7. Review Health Savings Accounts (HSAs)

If you have a Health Savings Account, make sure to contribute the maximum amount allowed. HSAs offer triple tax benefits: contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are tax-free.

• Example: Karen, who has a high-deductible health plan, contributed the maximum to her HSA before the end of the year. This reduced her taxable income and provided her with a tax-free way to save for medical expenses.

8. Plan for 1099s and Other Tax Forms

If you're self-employed or a freelancer, anticipate receiving 1099 forms and keep track of your income and expenses throughout the year. This will help you prepare for tax time and ensure you report everything accurately.

• Example: Mark, a freelance writer, kept meticulous records of all his income and expenses throughout the year. When tax season arrived, he was prepared and organized, making filing a breeze.

9. Consult a Tax Professional

If you have complex finances or are unsure about how to maximize your tax strategies, consider consulting a tax professional. They can provide personalized advice based on your specific situation and help you navigate any changes in tax laws.

• Example: Linda sought the help of a tax advisor who identified deductions and credits she hadn’t considered. With their guidance, she was able to save a significant amount on her tax bill.

At American Bank, we are dedicated to supporting our customers in all aspects of their financial lives, including tax planning. By being proactive and informed, you can navigate the complexities of tax season with confidence. Start planning today to ensure a prosperous year ahead!