What is End-of-Year Tax Planning?

As the year draws to a close, tax planning becomes a key part of making sure you’re ready for tax season. Taking a little time to review your finances now can make a big difference in how much you pay—and what you save—when it comes to your taxes. 

This isn’t just about avoiding stress; it’s about giving yourself the chance to adjust your strategies and take advantage of deductions or credits that might disappear after December 31st.

In this post, we’ll cover why end-of-year tax planning matters, strategies you can use to make the most of your tax situation, and how recent tax law changes might affect you. We’ll also dive into specific tips for high-income earners and business owners, and why consulting with a tax planning professional could be one of the smartest moves you make before year-end.

Why End-of-Year Tax Planning Matters

Avoid Last-Minute Surprises

No one likes an unexpected tax bill when April rolls around. By planning ahead, you can avoid the unpleasant surprise of owing more than anticipated. End-of-year tax planning allows you to check your income, deductions, and payments to make sure everything lines up before the deadline. This way, you’re not scrambling to find last-minute solutions or worrying about missed opportunities that could have saved you money.

Taking the time to organize your financial records and review your income means you’ll have a clearer picture of where you stand. You’ll be able to spot any gaps or missed deductions and make adjustments now, rather than when it’s too late. By staying ahead of the game, you’ll reduce the chances of a tax-time headache and take control of your financial situation.

Maximizing Tax Deductions and Credits 

One of the biggest advantages of year-end tax planning is the opportunity to maximize deductions and credits that may expire by December 31st. By taking a close look at your expenses and timing them strategically, you can reduce your tax liability. Consider the following ways to save:

Charitable Donations: Contributions made to qualified charities before year-end can lower your taxable income. Whether you’re donating cash, stocks that have appreciated in value, or goods, these gifts could reduce the amount you owe.

Medical Expenses: If you’ve had high out-of-pocket medical expenses this year, you might be able to claim a deduction once those costs surpass a specific percentage of your adjusted gross income (AGI). Settling any outstanding medical bills before the year ends could help you reach that required amount.

Education Costs: When it comes to education costs, some credits, like the Lifetime Learning Credit, are available for eligible expenses paid by the end of the year. Making these payments before the deadline could provide extra tax savings.

Managing Taxable Income 

Your taxable income can fluctuate year to year, which is why it’s important to look at strategies to manage it as December approaches. Depending on where you expect to fall in the tax brackets, you can make adjustments to either defer or accelerate income. Here’s a quick review of both:

Defer Income: If you expect to fall into a lower tax bracket next year, it might be beneficial to push any bonuses or extra income into the following year. Doing so could reduce your taxable income for the current year.

Accelerate Income: On the flip side, if you expect your income to increase significantly, taking income this year might reduce your future tax burden.

Reducing Estimated Tax Penalties 

If you’re self-employed or have income sources that don’t automatically withhold taxes, paying estimated taxes throughout the year is crucial. However, even the most diligent taxpayers can end up underpaying. To avoid penalties, it’s important to review your estimated payments before year-end and make adjustments if necessary. Here are a few steps to consider:

Adjust Withholdings: If you’ve had significant changes in income, consider adjusting your withholdings to ensure you meet the required tax payment threshold.

Make a Catch-Up Payment: If you’re short on estimated tax payments, making an extra payment before the year ends can help you avoid penalties and interest.

Key Strategies For Year-End Tax Planning

Retirement Contributions 

Making contributions to your retirement accounts before the year wraps up is a great way to reduce your taxable income while also setting aside funds for your future. Depending on your retirement account type, there are a few different options you can exercise:

Traditional IRA or 401(k): Putting money into these accounts lowers your taxable income for the year. The more you contribute, up to the annual limit, the more you can shrink your tax bill.

Roth IRA Conversion: If you’re considering converting traditional IRA funds into a Roth IRA, year-end is the time to assess if this makes sense for you. While this may increase your taxable income for the current year, future withdrawals will be tax-free.

Mega Backdoor Roth Contribution: If your 401(k) plan allows after-tax contributions, you may be eligible for a Mega Backdoor Roth contribution. This strategy lets you contribute above the regular 401(k) contribution limit and convert those contributions into a Roth IRA or Roth 401(k), providing a tax-free growth opportunity. It’s worth exploring this option as part of your year-end tax planning to maximize retirement savings and reduce future tax burdens. Feel free to check out our Mega Backdoor Roth Contribution Case Study on a client we helped implement this strategy.

Harvesting Capital Gains and Losses 

If you’ve made investments during the year, taking the time to review your portfolio could save you money on taxes. Tax-loss harvesting is a strategy where you sell investments that haven’t performed well to offset your gains, helping to reduce your overall taxable income.

You can also use this approach to manage your capital gains rates:

Offsetting Gains with Losses: Selling investments at a loss allows you to offset capital gains from other investments. If your losses are greater than your gains, you can also deduct up to $3,000 from your ordinary income.

Holding Investments for Favorable Rates: If possible, try to hold onto investments for at least one year to qualify for the lower long-term capital gains rate, which can significantly reduce the taxes you owe.

Charitable Giving 

Giving to charity before December 31 not only allows you to support meaningful causes but can also help lower your tax bill. To make the most of your donations, consider these tax-smart approaches:

Qualified Charitable Distributions (QCDs): If you’re over 70½ and have an IRA, you can use a QCD to donate up to $100,000 tax-free directly from your account. This reduces your taxable income while supporting charity.

Donating Appreciated Assets: Rather than selling investments that have gained value and paying capital gains tax, you can donate them directly. This way, you avoid the capital gains tax and can still claim a deduction based on the asset’s full market value.

Donor-Advised Funds: These funds let you make a charitable donation (which is often an appreciated investment asset), get an immediate tax deduction, and choose the recipient at a later time. This option offers flexibility while still giving you tax benefits before the year ends.

Managing Required Minimum Distributions (RMDs) 

If you’re 73 or older, the IRS requires you to take distributions from your retirement accounts, known as RMDs, by the end of each year. Failing to do so can result in steep penalties, so it’s important to ensure you’ve met the required amounts.

Consider these strategies:

Take Your RMD Early: By taking your distribution early in the year, you avoid the rush and minimize the risk of missing the deadline.

Combine RMDs with Charitable Giving: If you don’t rely on the RMD for your living expenses, you can use a Qualified Charitable Distribution (QCD) to meet your distribution requirements while lowering your taxable income.

Estate and Gift Tax Planning 

If you’re thinking about estate planning or gifting assets to loved ones, year-end is a great time to review your options. You can unlock certain tax benefits by taking action before December 31:

Annual Gift Exclusion: In 2024, you’re allowed to give up to $18,000 per person without incurring gift tax. This is an effective way to pass on wealth to your loved ones while also lowering your taxable estate.

Lifetime Exemption Limits: For larger gifts, the lifetime gift and estate tax exemption is currently at a historically high level (presently $13.61million). Acting now can help you reduce future estate taxes, as these exemptions are subject to change.

Please Note: The high lifetime exemption may be coming to an end very soon due to legislative changes. Please review the TCJA section below to know more about how your exemption may be affected.

How Recent Tax Law Changes Impact Year-End Planning

Tax laws are constantly evolving, and it’s important to stay informed about the latest changes that may affect your year-end planning. The Tax Cuts and Jobs Act (TCJA) introduced significant updates, and there are always potential adjustments that could impact how you approach your taxes.

Impact of TCJA (Tax Cuts and Jobs Act) Provisions

The TCJA brought about a number of changes that still influence tax planning today. Some of these provisions are set to expire in the coming years, so it’s important to consider them when reviewing your year-end strategy:

Increased Standard Deduction: The TCJA significantly raised the standard deduction, meaning fewer people now itemize their deductions. It’s worth reviewing whether you’ll save more by taking the standard deduction or if itemizing would result in greater tax savings.

Limits on SALT Deductions: Under the Tax Cuts and Jobs Act, there is now a $10,000 limit on how much you can deduct for state and local taxes. For residents in states with higher tax rates, this restriction can significantly lower the amount you’re able to write off for things like property taxes and income taxes, potentially increasing your overall tax bill.

Increase in the Lifetime Exemption: A key feature of the TCJA was the temporary boost in the lifetime exemption for gift and estate taxes, offering significant estate planning opportunities. For 2024, the exemption amount is $13.61 million per individual, allowing you to transfer a substantial amount of wealth without incurring estate or gift taxes. This increase provides an excellent opportunity for wealth transfer strategies, especially for individuals and families looking to minimize their estate tax burden.

Please Note: Several major provisions of the TCJA, such as adjustments to tax brackets and the higher standard deduction, are scheduled to expire in 2025. The lifetime gift and estate tax exemption will also revert to pre-TCJA levels, estimated to be around $5.6 million per individual, adjusted for inflation. This potential reduction in the amount you can transfer tax-free makes it important to consider wealth transfer strategies before these changes take effect.

Tax Planning For High-Income Earners

High-income earners face unique tax challenges, particularly when it comes to minimizing exposure to additional taxes and penalties. By being proactive, you can identify strategies to manage your taxable income, reduce the risk of triggering higher taxes, and make the most of available deductions.

Avoiding the Alternative Minimum Tax (AMT) 

The Alternative Minimum Tax (AMT) was designed to ensure that high-income individuals pay a baseline amount of tax, regardless of the deductions and credits they use. If your income surpasses a certain level, you may be subject to the AMT, which operates under a different set of rules from regular income tax. To help reduce your chances of being affected, consider these strategies:

Timing Deductions: Certain deductions, like state and local taxes, aren’t allowed under the AMT. Shifting when you take these deductions can help you avoid triggering the AMT.

Deferring Income: If you expect to fall into the AMT range, consider deferring bonuses or exercising stock options to reduce your taxable income for the current year.

Strategies for Business Owners 

As the year draws to a close, business owners have several options to minimize their tax liability and take advantage of available deductions. Here are a few strategies to help reduce your taxes:

Immediate Depreciation: Section 179 allows for the full deduction of eligible equipment purchases in the year they’re bought. This offers a chance to decrease your taxable income significantly by deducting the entire cost upfront.

Business Income Deduction: Depending on your business structure, you may be able to deduct up to 20% of your qualified business income. It’s important to verify eligibility and calculate how much this deduction could save you.

Deducting Home Office Expenses: If your business operates from home, you may be able to claim a tax deduction for a portion of your household expenses, such as rent, utilities, and upkeep. To qualify, the area you use must be exclusively dedicated to business activities.

Business Vehicle Tax Write-Offs: If you use your vehicle for work-related purposes, you can deduct the associated costs. You have the choice between deducting the actual expenses (such as fuel, maintenance, and depreciation) or using the IRS’s standard mileage rate to simplify the process.

Retirement Plan Contributions for Business Owners: Contributions to retirement plans, like SEP IRAs, SIMPLE IRAs, or 401(k)s, offer a valuable tax benefit by reducing your taxable income. These contributions can be made until the tax filing deadline and still count for the current tax year.

Health Insurance Deduction for the Self-Employed: If you are self-employed, the cost of health insurance premiums for you and your family can be deducted from your taxable income, even if you don’t itemize other deductions on your tax return.

Write Off Bad Debt: For businesses that use accrual accounting, you can deduct uncollectible debts from your taxable income as bad debt, providing some relief for unpaid invoices or loans.

Charitable Contributions: Donations to qualified charities are tax-deductible, reducing your taxable income. Make sure your contributions are properly documented, as only donations to IRS-recognized organizations are eligible.

Start-Up Expense Deduction: New businesses can write off up to $5,000 in start-up and organizational costs in the first year, helping offset the financial burden of getting the business off the ground.

Prepaying Expenses: Prepaying certain expenses like next year’s rent, insurance premiums, or other upcoming bills before the year ends can help reduce your taxable income for the current year, potentially lowering your tax bill.

Tax Planning for Investment Portfolios

High-income earners with significant investments need to balance their investment goals with tax efficiency. Proper tax planning for your portfolio can help reduce your tax burden without compromising your long-term financial objectives. Here are some strategies to consider:

Tax-Exempt Bonds: Municipal bonds offer a way to earn income that is generally not subject to federal taxes, and in many cases, state taxes are avoided too.

Balancing Gains and Losses: Offset gains with losses to lower your taxable income. For example, you can sell underperforming investments to offset capital gains from other investments.

Planning Ahead For Next Year’s Taxes

Year-end tax planning doesn’t just help you for the current year—it also sets the stage for the year ahead. By making a few adjustments early on, you can reduce stress and make sure you’re on track for the next tax season.

Setting Goals for the Coming Year 

A key part of smart tax planning is reviewing your current financial situation and setting goals for the upcoming year. Here’s how to get started:

Adjust Your Withholdings: If you ended up with a large tax bill or an oversized refund this year, it might be a good idea to adjust your withholdings or estimated tax payments. This can help you better manage your tax situation and avoid surprises next year.

Review Major Life Changes: Life events such as marriage, a new job, or buying a house can affect your tax situation. Planning ahead ensures you’re prepared.

Reassess Your Estimated Tax Payments: If your income varies or you’re self-employed, updating your estimated tax payments can help prevent penalties.

Plan for Large Purchases: If you’re considering making a significant investment, such as home improvements or buying a vehicle, think about how the timing of these expenses could benefit you tax-wise.

Evaluate Health Savings Accounts (HSAs): Contributions to an HSA are tax-deductible, providing a way to lower your taxable income while setting aside money for future medical expenses. Planning ahead can help you take full advantage of this benefit.

Creating a Long-Term Tax Strategy 

Tax planning isn’t just a year-end task—it’s part of a broader, long-term financial strategy. Here are ways to incorporate tax efficiency into your overall plans:

Retirement Planning: Regularly review your contributions to tax-advantaged accounts, like IRAs and 401(k)s, to stay on track with your savings and tax goals.

Estate Planning: Tax planning plays a significant role in estate planning, helping you preserve more of your wealth for future generations.

Review Tax-Efficient Investments: Revisit your portfolio to ensure you’re using tax-efficient investments like municipal bonds, which are exempt from federal taxes.

Consider Education Savings Plans: If you have children or grandchildren, contributing to a 529 plan can offer tax-free growth for qualified education expenses.

Plan for Charitable Donations: Establish a long-term giving plan that maximizes the tax benefits of charitable contributions, including donor-advised funds or legacy planning.

Get Help With Your End-Of-Year Tax Planning

End-of-year tax planning is one of the smartest ways to take control of your finances and reduce your tax burden. By reviewing your financial situation before December 31st, you open up opportunities to save through deductions, manage taxable income, and avoid costly surprises during tax season. Whether you’re adjusting retirement contributions, harvesting capital losses, making charitable donations, or managing required minimum distributions, these strategies allow you to act now rather than scramble later.

Planning ahead also ensures that you’re prepared for the next tax year. Setting clear goals, such as adjusting withholdings or reassessing estimated tax payments, helps avoid penalties and keeps your finances in order. Long-term strategies like tax-efficient investments, education savings plans, and estate planning can further align your taxes with your broader financial objectives.

While many of these tactics can be implemented on your own, consulting a tax professional can make a significant difference, especially if you’re dealing with complex situations like business ownership, large investments, or high income. A professional advisor can help you uncover hidden opportunities and ensure you’re fully compliant with the latest tax laws, minimizing mistakes that could cost you.

Now is the time to take action! Don’t wait until tax season to scramble for last-minute solutions. By scheduling a consultation, you’ll gain the insight and guidance needed to maximize your tax savings and set yourself up for long-term financial success. Use the button below to schedule an appointment with one of our advisors today.