As the end of the year approaches, many individuals and businesses turn their attention to tax planning. Proper tax planning can make a significant difference in the amount of taxes you owe or the size of your refund. Nathan Duane Oeming emphasizes that by implementing last-minute strategies to reduce your taxable income and take advantage of available tax credits, you can optimize your financial situation. Nathan Oeming of Eugene, Oregon, provides some essential year-end tax planning tips to help you maximize your deductions and credits.
1. Review Your Income and Expenses
Nathan Duane Oeming explains that the first step in effective year-end tax planning is to review your income and expenses for the year. Understanding where you stand financially allows you to identify opportunities for deductions and credits. Gather all necessary documentation, including income statements, receipts, and records of expenses. This will help you make informed decisions about actions to take before the year ends.
2. Maximize Retirement Contributions
One of the most effective ways to reduce your taxable income is by contributing to retirement accounts. Contributions to traditional IRAs and 401(k) plans are tax-deductible, meaning they reduce your taxable income. For 2024, the maximum contribution limits are $6,500 for IRAs (with an additional $1,000 catch-up contribution if you’re over 50) and $22,500 for 401(k) plans (with a $7,500 catch-up contribution for those over 50). Nathan Oeming of Eugene, Oregon, recommends that if you haven’t maxed out your contributions, consider doing so before December 31. Not only does this reduce your taxable income, but it also helps secure your financial future.
3. Harvest Capital Losses
If you have investments in taxable accounts that have lost value, consider harvesting those losses to offset any capital gains you may have realized during the year. Nathan Duane Oeming explains that this strategy, known as tax-loss harvesting, can reduce your taxable income. You can deduct up to $3,000 of capital losses against ordinary income annually, and any excess losses can be carried forward to future years.
4. Defer Income
If possible, consider deferring income to the following year. This strategy is particularly useful if you expect to be in a lower tax bracket next year. Nathan Duane Oeming explains that by deferring bonuses, freelance income, or other sources of income until January, you can potentially reduce your taxable income for the current year.
5. Accelerate Deductions
Conversely, if you expect to be in a higher tax bracket next year, accelerating deductions can be advantageous. Nathan Duane Oeming understands that this means making deductible payments before the end of the year. For example, you can make an extra mortgage payment, pay property taxes early, or make additional charitable contributions. These actions can increase your itemized deductions and reduce your taxable income for the current year.
6. Charitable Contributions
Nathan Duane Oeming explains that charitable donations are a great way to reduce your taxable income while supporting causes you care about. Ensure that you donate to qualified charitable organizations and keep receipts for all contributions. You can donate cash, goods, or even appreciated stock, which can provide an additional tax benefit by avoiding capital gains tax on the appreciation. For 2024, you can deduct cash contributions up to 60% of your adjusted gross income (AGI). If you exceed this limit, the excess can be carried forward for up to five years.
7. Utilize Flexible Spending Accounts (FSAs)
If you have a flexible spending account (FSA) for medical or dependent care expenses, ensure you use the funds before the year ends. FSAs typically have a “use-it-or-lose-it” rule, meaning any unused funds may be forfeited. Some plans offer a grace period or allow a small amount to be carried over, so check with your plan administrator for specific details. Consider scheduling medical appointments, purchasing necessary medications, or making eligible purchases to use up your FSA funds.
8. Take Advantage of Tax Credits
Tax credits can directly reduce your tax liability, so it’s essential to explore all available credits. Nathan Oeming of Eugene, Oregon, explains that some common credits include:
- Earned Income Tax Credit (EITC): For low- to moderate-income workers and families, the EITC can provide a substantial benefit. Ensure you meet the eligibility requirements and file a tax return even if you don’t owe any taxes, as the EITC is refundable.
- Child Tax Credit: For 2024, the Child Tax Credit is up to $3,600 per qualifying child under age six and $3,000 for children ages six to 17. Ensure you have accurate information about your dependents to claim this credit.
- Education Credits: If you or a dependent is pursuing higher education, you may qualify for the American Opportunity Credit or the Lifetime Learning Credit. These credits can help offset the cost of tuition, fees, and other qualified expenses.
- Energy Credits: If you’ve made energy-efficient improvements to your home, such as installing solar panels or energy-efficient windows, you may be eligible for energy tax credits. These credits can reduce your tax liability and promote environmental sustainability.
9. Review Your Withholding and Estimated Taxes
If you’ve had significant changes in your income or deductions this year, it’s wise to review your withholding and estimated tax payments. Underpaying your taxes can result in penalties, while overpaying means giving the government an interest-free loan. Use the IRS withholding calculator or consult with a tax professional to ensure you’re on track.
10. Consult a Tax Professional
Nathan Duane Oeming understands that tax laws are complex and subject to change, making it beneficial to consult with a tax professional. A tax advisor can provide personalized advice based on your unique financial situation and help you identify additional strategies to maximize your deductions and credits. They can also assist with year-end tax projections and ensure you comply with all tax regulations.
Year-end tax planning is a crucial part of managing your finances effectively. Nathan Oeming of Eugene, Oregon, emphasizes that by taking proactive steps to maximize your deductions and credits, you can reduce your taxable income and potentially lower your tax bill. Review your income and expenses, contribute to retirement accounts, harvest capital losses, and consider deferring income or accelerating deductions. Utilize tax credits and ensure you use FSA funds before the year ends. Consulting a tax professional can provide valuable guidance and help you navigate the complexities of the tax code. With careful planning, you can optimize your financial situation and set yourself up for a successful new year.
