With the arrival of fall, it’s the perfect time to take action and possibly lower your tax bill for this year and 2025.
First, you need to decide whether you’ll take the standard deduction or itemize for 2024. You might skip itemizing, given the 2024 standard deduction amounts are relatively high–$29,200 for joint filers, $14,600 for singles and separate filers, and $21,900 for heads of household. Plus, many itemized deductions have been reduced or suspended under current law.
If you choose to itemize, it is possible to deduct medical expenses over 7.5% of adjusted gross income (AGI), state and local taxes up to $10,000, charitable contributions, and mortgage interest, but only if these deductions exceed your standard deduction.
The benefits of bunching
You can work around deduction limits by bunching discretionary expenses–like medical or charitable donations–into one year. For example, if you itemize for 2024 but not for 2025, consider making two years’ worth of charitable donations this year.
Tax planning tips
- Postpone income until 2025 and accelerate deductions into 2024 to claim larger tax breaks that phase out with higher AGI, like deductible IRA contributions, the Child Tax Credit, education tax credits and student loan interest deductions. Deferring income may also help if you expect to be in a lower tax bracket next year. On the other hand, if you expect to be in a higher tax bracket next year, it may be advantageous to pull income into 2024.
- Maximize retirement contributions to 401(k)s or IRAs to reduce taxable income.
- High earners need to watch out for a 3.8% tax on certain types of unearned income. This net investment income tax (NIIT) is the lesser of net investment income (NII)–which includes interest, dividends, and rental income–or the amount by which your modified adjusted gross income (MAGI) is over a set threshold. For 2024 those thresholds are $250,000 for joint filers or surviving spouses, $125,000 for married individuals filing separately and $200,000 for others. Remember, income from IRA or other retirement plan distributions do not count NII.
- If you have underperforming investments, consider selling them to offset gains from other assets.
- If you’re 73 or older, avoid penalties by taking the required minimum distributions (RDMs) from your retirement accounts.
- If you’ve got funds in a tax-advantaged flexible spending account, be sure to spend it before December 31, or you risk losing them under the “use it or lose it” rule.
- Work with your employer to defer a bonus until early 2025 in order to reduce 2024 taxable income.
- If you’re 70½ or older by the end of 2024, think about making charitable contributions through qualified charitable distributions from your traditional IRA. This can be especially helpful if you don’t itemize deductions because the donation goes directly to charity and won’t be included in your gross income or deducted on your tax return.
- Be sure to make gifts under the annual gift tax exclusion before the year ends. For 2024, you can give up to $18,000 per recipient. Gifting income-earning assets to family members in lower tax brackets who aren’t subject to the kiddie tax can help reduce your family’s overall tax burden.
These are just a few of the year-end strategies that can help lower your tax bill. Reach out to your Smolin advisor today to build a custom plan for your unique financial situation.