Top Year-End Tax Planning Strategies

With a thorough understanding of their unique circumstances and the latest tax regulations, you can transform complex tax challenges into clear, actionable solutions—setting the stage for your clients’ financial success in 2025 and beyond.

Year-end tax planning is more than a routine task; it’s a chance to craft strategies that turn last-minute financial stress into actionable opportunities.

By applying techniques such as tax-loss harvesting, charitable bunching, accelerating deductions, and deferring income, you can help your clients achieve significant tax savings and prepare for a financially strong year ahead.

Tax-loss harvesting: Turning losses into gains

Tax-loss harvesting is a powerful tool to reduce taxable income by selling investments that have lost value to offset capital gains and up to $3,000 of ordinary income. For example, if a client realizes $50,000 in capital gains but also harvests $50,000 in capital losses, their net capital gain becomes zero, eliminating the associated tax liability.

When employing this strategy, it’s crucial to navigate the wash-sale rule carefully. This rule disallows a deduction if a client repurchases the same or substantially identical security within 30 days before or after the sale. Adhering to this guideline ensures that your client fully benefits from the tax-loss harvesting strategy.

Charitable bunching: Maximizing deductions through strategic giving

The Tax Cuts and Jobs Act of 2017 made it more challenging for many taxpayers to benefit from itemizing deductions due to the increased standard deduction. Charitable bunching offers a creative workaround. By consolidating multiple years’ charitable donations into a single tax year, clients can exceed the standard deduction threshold and unlock the tax advantages of itemization.

One effective way to implement this strategy is by setting up a donor-advised fund (DAF). With a DAF, clients can make a lump-sum donation, receive an immediate tax deduction, and distribute the funds to their chosen charities over time. This approach provides flexibility and amplifies the impact of their giving.

Accelerating deductions and deferring income: Timing is everything

Optimizing the timing of income and deductions can provide significant tax savings, particularly for clients nearing thresholds where deductions or credits phase out.

Accelerating deductions: Clients can prepay certain deductible expenses, such as mortgage interest or medical bills, before the year ends. By doing so, they may boost their itemized deductions for the current year and reduce their taxable income.

Deferring income: Postponing income, such as bonuses or consulting fees, into the following tax year can be particularly effective if a client expects to fall into a lower tax bracket next year. This strategy provides immediate relief while aligning with long-term financial goals.

Additional considerations for year-end tax planning

Qualified charitable distributions (QCDs): Clients aged 70½ or older can benefit from QCDs by transferring up to $105,000 directly from their IRA to a qualified charity. These distributions count toward their required minimum distributions and are excluded from taxable income, offering a tax-efficient way to support charitable causes.

Retirement account contributions: Encouraging clients to maximize contributions to their retirement accounts can significantly lower their taxable income. For 2024, the contribution limits are $23,000 for 401(k)s (plus a $7,500 catch-up for those 50 and older) and $7,000 for IRAs (with a $1,000 catch-up).

Roth IRA conversions: For clients expecting higher future tax rates, converting traditional IRAs to Roth IRAs can be a wise move. While the conversion amount is taxed now, future withdrawals will be tax-free, making this a strategic long-term investment.

Reviewing withholding and estimated tax payments: Ensuring clients have paid at least 90% of their tax liability through withholding or estimated payments is critical to avoiding underpayment penalties. This year, these penalties have risen to 8% for the first three quarters of 2024, making accurate payment calculations even more essential.

Conclusion

Year-end tax planning is your opportunity to deliver immense value to your clients. By leveraging strategies like tax-loss harvesting, charitable bunching, accelerating deductions, and deferring income, you can help them minimize their tax liabilities while aligning their financial actions with broader goals.

With a thorough understanding of their unique circumstances and the latest tax regulations, you can transform complex tax challenges into clear, actionable solutions—setting the stage for your clients’ financial success in 2025 and beyond.