Maximize Your Returns: A Savvy Guide to Year-End Tax Planning
Francisco Pedrozo
As we approach the year’s end, it is time to finish strategizing for the upcoming tax season. Tax planning can be a complex, but crucial endeavor. The decisions you make now can significantly impact your tax liability.
In this blog, we will look into year-end tax planning essentials, providing insights on several key areas to help maximize tax efficiency.
Income Tax Projection and Estimated Payments
Tax projections are a very useful tool to get an understanding of what your tax situation may look like in the coming year. They are essentially a preview estimating your tax liability. Anyone expecting to owe $1,000 or more at tax time should make estimated payments throughout the year. These payments are due quarterly on April 15th, June 15th, September 15th and January 15th for individual taxpayers.
IRAs, QCDs, and RMDs
When planning for retirement, it is important to consider the tax consequences. Individual Retirement Accounts (IRAs) come with a variety of benefits depending on individual needs. The 2024 contribution limit on traditional and Roth IRA accounts is $7,000 with an additional $1,000 if over the age of 50. Individuals can contribute to 2024 IRA accounts until April 15th, 2025. While Roth contributions are not deductible, traditional IRA contributions may be.
Qualified Charitable Distributions, also known as QCDs, allow qualified IRA owners to donate to charities tax-free. Usually, distributions from a traditional IRA are taxable when taken out, but with a QCD, these distributions become tax-free if it is paid directly from the IRA to an approved charitable organization. The 2024 limit for IRA owners age 70 ½ and older is $105,000.
It is also important to keep track of Required Minimum Distributions (RMDs). These are required distributions from retirement accounts once you reach the age of 73. It is worth noting that Roth IRA accounts are exempt from the RMD rule.
Year-End Gifting and the Lifetime Exclusion
Gifting can be a great tool for estate planning. In 2024, individuals can gift up to $18,000 to a single recipient without incurring gift tax. In 2025, the limit will increase to $19,000 per donor. It is also important to keep in mind the lifetime exclusion related to gifting. Depending on legislation, the exclusion may be bumped up from the current $13.61 million to $13.99 million for individuals in 2025.
529 Plan Contributions and Deductions
Individuals should also consider gifting to a 529 plan on behalf of a child or grandchild. A 529 plan offers tax-deferred growth and tax-free withdrawals when used on qualified expenses. These plans allow a tax deduction in certain states while also helping families with the cost of education. In Pennsylvania, the deduction for the donor is equal to the gift tax limit per recipient. After 15 years of creation, 529 plans may be eligible for up to a $35,000 transfer to a Roth IRA account.
Update Estates, Trusts, and Wills
Reviewing your personal documents at least annually is a worthwhile task. It is also always a good idea to review and update these documents after a major change in your life. Whether that be marriage, divorce, birth of a child or even if you just want to change or add a beneficiary or trustee. Staying up to date with your estates, trusts, and wills can be a big help in the case of an untimely event.
Summary
Year-end tax planning is an intricate process that requires careful consideration of several factors. Because your tax liability can be significantly impacted, it’s a good idea to seek advice from professional tax advisors. To reach the Louis Plung & Company team of advisors, e-mail [email protected].
