Year-End Strategies to Minimize Taxes

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As the end of the year approaches, the Financial Consulate can play a crucial role in helping clients take advantage of tax opportunities and minimize tax liabilities. Effective year-end tax planning can significantly impact a client’s financial health, ensuring they take full advantage of available deductions, credits, and strategies. Here are some of the top year-end tax planning strategies to discuss with your advisor:

1. Maximize Health Savings Accounts (HSAs) Contributions

If you are familiar with our articles, you know we love the HSA. Contributions to HSAs are tax-deductible, growth on funds are tax-deferred, and withdrawals for qualified medical expenses are tax-free. The contribution limit for 2024 is $8,300 for a family plan, with an additional $1,000 contribution allowed if 55 or older. Further, if your spouse is covered by the plan and is 55 or older, the spouse can open an HSA account to contribute $1,000 each year they are covered. Unlike Flexible Spending Accounts (FSAs), HSA contributions stay in the account until the owner withdraws funds; thus, HSAs are a strong long-term savings tool for healthcare costs. Contributions to HSAs through payroll are deductible before FICA and Medicare taxes, unlike retirement accounts, therefore potentially adding 7.65% in savings on contributions on top of income taxes.

2.Optimize Deductions and Credits

Year-end is the perfect time to review potential deductions and credits. This time of year, our advisors are preparing tax projections to review clients’ tax situations to make them aware of various deductions they might qualify for, such as charitable contributions, mortgage interest, and medical expenses. Consider bunching strategies for deductions—contributing to charity or paying medical bills in one year rather than spreading them across two or more—which can maximize tax deductions by reducing overall tax liability in multiple years.

3. Evaluate Charitable Giving Strategies

For clients who are charitably inclined, Donor-Advised Funds (DAFs) and Qualified Charitable Distributions (QCDs) can be an effective way to manage charitable donations while allowing clients to reduce their tax liability:

1. Using a DAF has many benefits, such as simplicity for tax reporting and the ability to bunch your giving into one year to maximize your deduction while spreading grants from the DAF over multiple years. A very efficient way of donating to a DAF is by gifting highly appreciated assets instead of cash, thus avoiding capital gains taxes.
2. Gifting using QCDs has many advantages, such as using pre-tax assets to donate, the ability to satisfy some or all your Required Minimum Distributions, and the ability to reduce income before Adjusted Gross Income for IRMAA and medical expenses deduction floor purposes. Keep in mind that individuals must be 70 ½ years old to use QCDs, and they are only allowed to be distributed from IRAs.

4. Maximize Retirement Contributions

Consider contributing the maximum allowable amount to employer retirement accounts, such as 401(k)s, 403(b)s, TSPs, etc. These contributions could reduce taxable income; however, we also help clients review their current versus their potential future tax situations to educate clients regarding whether contributing to Roth options, if available inside their employer plans, may be beneficial. The goal is to help clients save as much for retirement as cash flow allows, as efficiently as possible. Employees can only contribute to employer retirement plans through payroll, and so the deadline to contribute is December 31. Traditional and Roth IRAs contributions can be made until the April 15 tax filing deadline.

5. Review and Harvest Tax Losses 

Tax loss harvesting involves selling investments that have declined in value to offset gains realized from other investments. This strategy can help lower a client’s taxable income by offsetting capital gains realized during the year, but capital losses are limited to $3,000 per year. If your portfolio has unrealized losses, consider reaching out to your advisor to discuss whether you should consider realizing losses to offset capital gains or to reposition your portfolio.

6. Consider Distribution Strategies

Individuals with taxable, tax-deferred, and Roth accounts should consider their withdrawal strategies carefully. As a client of the Financial Consulate, we will continuously review clients’ tax situations to make sure they are distributing assets in the most efficient way. We routinely discuss the implications of withdrawing from different types of accounts to manage tax brackets effectively, not only this year, but also taking into consideration future years and future generations, depending on the client’s overall plan.

7. Have a Plan for Required Minimum Distributions (RMDs)

Having a plan for RMDs should not start for clients turning RMD age (currently 73) or who are already taking RMDs from their retirement accounts. We start strategizing how to work around the pitfalls of the United States’ tax system well before RMD age. Strategies such as Roth conversion in early retirement or in lower-income years help to reduce RMDs. As mentioned above, QCDs can begin to be used at age 70 ½, well before the current beginning RMD age. Advisors at the Financial Consulate will assist clients in maximizing the assets in their accounts, for example, by using the rule that an RMD from one IRA can be taken out of another IRA in the same individual’s name. Talk to your advisor if you are unsure what your RMD plan is.

8. Analyze Tax Withholding

Is your withholding adequate to avoid underpayment penalties and interest? Consider having your advisor review your withholding by preparing a tax projection to analyze if your current withholding will provide you relief from penalties and interest, also known as Safe Harbor.

Conclusion

Effective year-end tax planning is a critical component of financial advising. By working with the Financial Consulate, we can work to minimize tax liabilities and optimize financial planning opportunities each year. The Financial Consulate constantly stays informed regarding any potential or passed regulations. If any changes are made, we will be sure to reach out to advise on the best action to take with the change for each client’s situation. Regular meeting to discuss your financial accounts and changes to your life help us update your overall tax strategies for your situation. Finally, year-end tax planning should not be an isolated event and is a major piece of financial planning. We urge you to reach out to your advisor if any there are changes in your income, expenses, or life circumstances that may affect tax situations so that we can walk you through any financial decisions that arise.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.