You may be drinking cider and curling up by the fire now, but before you know it tax time it will be upon us. The end of the year is a great time to review your taxes in preparation for filing Tax return for 2024especially if you expect your financial situation to change significantly in 2025.
Several tax strategies can reduce your tax burden and help you get a bigger tax refund, but you'll need to act soon, as some steps require preparation to be completed before December 31, 2024.
Read more: Watch out for this tax change if you earned money from Venmo, Cash App or Paypal this year
It's worth taking the time to review your tax situation now, because a little effort now can pay off big later. Read on to find year-end tax tips that will prepare you for the upcoming tax season.
1. Double check your paycheck for withholding tax
The United States has a pay-as-you-go income tax model, whereby your employer withholds money from your salary and freelancers have to pay estimated taxes quarterly. Not paying enough taxes during the year can result in a penalty at tax time.
Your employer determines the amount you withhold from your paycheck with your W-4 tax form, which includes your filing status and estimated tax deductions. The end of the year is a great time to review your W-4 and current withholding to decide if you want to change it.
IRS Withholding Tax Estimator Tool allows you to estimate your current withholding and projected tax refund to adjust your W-4 form. You can submit an updated Form W-4 to your company at any time, and your employer must implement your changes by the beginning of the first payroll period, which is 30 days or longer after you file your W-4.
2. Sell losing stocks to recoup your capital gains
It's been a huge year for stocks in 2024 — the S&P 500 is up a whopping 30% — but there are still plenty of stocks that have lost money this year. One bright spot on potential stock losses is the opportunity for exercise.”tax loss harvesting.
This tax strategy works by realizing losses or selling your stocks and assets that have lost value, to offset other capital gains you may have earned. For example, if you made a $25,000 profit on the sale of real estate in 2024, but lost a lot on your investment in struggling stocks (like Intel), you can sell your securities and deduct the financial loss on that investment from your capital gains. If you have a $25,000 stock loss, you will offset the $25,000 you earned from the sale of real estate to eliminate that tax burden.
Capital gains include any income you earn by selling assets, such as stocks, real estate, cars, furniture, or any other tangible assets, but you must actually sell the assets to realize losses and offset gains.
3. Maximize contributions to retirement accounts
Pension funds like 401(k) accounts and IRAs provide one of the most productive tax deductions because you can lower your tax bill while building a nest egg for the future. If you can afford it, max out your possible contributions to any retirement account before the end of the year.
On limit on the deduction for 401(k) contributions for taxes in 2024 is $23,000, and it does no employer contributions count. A worker in the 24% tax bracket could knock nearly $5,000 off their tax bill just by saving money for the future. Increase your regular 401(k) contribution percentage for the last pay period in 2024 to make the most of your potential retirement deductions.
If you're over 50, you can contribute more to your 401(k) with “top-up” contributions. totaling $7,500 per year (or $30,000 total) in 2024, if allowed by your 401(k) plan. You don't even need to be “behind” on your 401(k) contributions to make additional deferrals in your account.
For IRAs, the maximum amount of tax-deductible contributions for 2024 is $7,000, or $8,000 if you're over 50. The amount of money you can deduct from your taxes depends on both your income and whether you have a job or retirement plan.
4. Make your home more energy efficient
Thanks to Inflation Reduction Act of 2022there are great incentives to make your home “greener” in 2024. The law increased the amount of tax credits you can get for making your home more energy efficient. For this tax year, the clean energy housing loan — which pays back for installing solar panels, geothermal heat pumps, fuel cells and battery storage — is still at 30%.
Tax credits have more of an impact on your tax bill than deductions. Deductions reduce your level of taxable income, tax credits directly reduce the amount of taxes you owe to the IRS.
Installing a solar power system, wind turbine or geothermal heat pump can now get you 30% back on the cost if you complete it before 1 January 2025. In California, average cost of solar installation is $11,563. If you make that average improvement to your home in 2024, you'll reduce your taxes by $3,467.
Tax credits for energy improvements are not limited to alternative energy. Easy to install new, qualified Energy Star certified furnaces and boilers it can also reap tax credits, although smaller than for alternative energy. Be sure to check the manufacturer's tax certification statement, as not every Energy Star-certified product is eligible.
5. Could you defer a bonus or payment at the end of the year?
It's not always easy to delay payment from your employer, but if you receive a bonus at the end of the year and want to reduce your taxable income as much as possible this year, consider asking your company to pay you in January.
Similarly, if you're a freelancer or contractor and want to reduce your taxable income for 2024, consider delaying your invoices until December so you don't get paid until January. You're just deferring paying income taxes on that money until your taxes are due in 2025, so you'll need to strategize whether this year or next year would be better to earn that money.
6. Donate to charity now if you want more tax deductions
If you itemize your tax deductions and want to contribute financially to the causes and groups you support, do so before the end of the year to best reduce your taxable income for 2024. Most taxpayers generally can refuse charitable donations up to 50% of their taxable income.
Before donating, check if your contribution will be tax deductible by searching at IRS Tax Exempt Organization Database. All valid charities and non-profit organizations will also have a tax identification number that identifies them as tax-exempt.
7. Check required minimum distributions from IRA and 401(k) accounts.
US tax law requires Americans to begin taking distributions from their personal or work retirement accounts when they reach a certain age. Starting in 2023, the SECURE 2.0 Act raises that age from 72 to 73, for those who turn 72 after December 31, 2022.
These distributions are required for 401(k) plans, traditional IRAs, profit-sharing plans, and pensions. They are no required for a Roth IRA while the owner is alive.
Required minimum distributions, or RMDs, are calculated by adding up all the money in your retirement accounts and dividing by the IRS's life expectancy factor. The Securities and Exchange Commission provides a simple calculator which includes the latest IRS life expectancy tables.
Your retirement plan administrator is required to follow RMD tax law, it's up to you to make sure you're getting the right amount. If you do not meet the required amount for your RMD, you will face the most severe penalty from the IRS around. The excise tax on RMD failures was 50% in the past, but the SECURE 2.0 Act lowers that penalty to 25%, and further down to 10% if the RMD is corrected within two years.
However, if you were required to withdraw $20,000 in 2024 but only received $10,000, you could be in for a $2,500 penalty. It's definitely worth rechecking your RMD for 2024 and withdrawing more money if needed.
8. Combine your medical expenses into one year
Medical expenses can be a significant deduction for many taxpayers, but the IRS only allows you to deduct expenses that are greater than 7.5% of your AGI. For example, if your AGI is $50,000 and you spent $5,000 on medical expenses, you can deduct $1,250 ($5,000 – ($50,000 x 7.5%) from your taxable income.
For that reason, it can be beneficial to group all of your major medical expenses into one year. These costs may include surgeries, preventive care, hospital visits, dental care, prescription drugs, eyeglasses, hearing aids, and mental health care such as therapy, as well as transportation costs to and from providers.
If you're approaching 7.5% of AGI in medical expenses this year, consider making as many of your expected health-related purchases as possible by the end of December. Straighten your teeth, buy your new glasses or schedule elective surgery by the end of 2024 and you'll maximize your medical deductibles.
Similarly, if you're not approaching that 7.5% of AGI threshold for medical expenses in 2024, hold off on any non-emergency health-related purchases until January, when they might be more tax-advantaged next year.
9. Strategize your business expenses
If you are self-employed or freelance, deducting your business expenses it can save you significant money on taxes. Depending on how much you've already spent on your professional work this year, you may want to consider prepaying next year's expenses before the end of 2024 to reduce your tax burden.
For example, instead of buying supplies monthly, you can order and pay in December 2024 for supplies you will use for several months from 2025. The timing of your deductions can depend on whether you use the cash method of accounting or the accrual basis, but carrying forward business expenses for the next year is a time-tested way to reduce your taxable income for the current year.
It is very important to note that everyone's tax situation is different. These year-end tax tips may be effective for you, but there is no “one size fits all” approach to tax preparation. Be sure to consult a tax professional before making any major tax decisions.
For more on the 2024 tax season, see how the income brackets and standard deduction are changing in 2025.