While financial planning is a timeless practice, there are some aspects that have a deadline of December 31st each year. The best way to plan is by addressing these topics throughout the year with your advising team. If you have not yet considered these items or would like to work them into your ongoing financial planning process, our team at Fairman Financial is at the ready to assist you.
1. Consider Charitable Contributions
Philanthropic contributions may factor into your tax planning process. There are multiple tax-smart tools you can use for your giving.
If you want to spread your donations over time, instead of giving all at once, you should consider a Donor Advised Fund (DAF). DAFs can provide you with immediate tax deductions, and they allow you to fund periodic contributions to a charitable organization of your choice.
A Qualified Charitable Distribution (QCD) is a beneficial option for those over 70 ½ to donate directly from an Individual Retirement Account (IRA). Instead of withdrawing your funds as taxable income for the year, you can give up to $105,000 to a public charity. For those in Required Minimum Distribution (RMD) age (also due by December 31, 2024), a QCD can satisfy a portion or all of your RMD, without incurring taxes.
You can also give appreciated securities held longer than a year to a charity or DAF. You will receive a charitable deduction equal to the value of contributed securities, up to 30% of your Adjusted Gross Income (AGI). Excess contributions can be carried over for up to five years, and embedded investment gains will not be taxed. These all make the gifting of appreciated securities a very tax efficient method of donating to charity.
Finally, you can designate tax-free contributions to certain educational funds and accounts. Educational Improvement Tax Credit (EITC) or Opportunity Scholarship Tax Credit (OSTC) allow you to donate to educational institutions. Taxpayers in Pennsylvania receive tax credits of up to 90% of their contribution, plus a Federal charitable deduction for the remainder.
2. Review Your Estate Plan and Make Gifts
It is always appropriate to evaluate your current estate plan to ensure that it reflects your intentions.
To protect your estate and beneficiaries after your death, now is a good time to re-examine wills and trusts with your attorney. Ensure that these documents reflect your intentions, especially if estate tax policies change in the future. Our team can help you decide on the best financial strategy ahead of updating these documents.
Taxpayers with significant assets should consider leveraging the current estate tax exemption. This policy allows an individual to give up to $13.61 million in assets without taxation, and that number doubles for married couples. While current law is set to change in 2026, it is important to monitor how any change in policy will impact your long-term plan.
For gifting alone, individuals can give up to $18,000 per recipient without taxation, or $36,000 per recipient for married couples. This type of gifting can be accomplished with either cash or appreciated securities, which could help donors save on capital gains taxes. It is important to note that two items that do not factor into the amounts listed above are direct payments of medical or educational expenses. Typically, those payments can be made directly to the institution without qualifying as a gift.
3. Time Your Income
Depending on your income level and expected tax rates, it may make sense to either accelerate or defer income. You can harvest capital losses to offset gains or consider harvesting gains if you anticipate higher tax rates in the future. This will allow you to lock in the current rate.
In some cases, you can time your income strategically to take advantage of changing tax rates. If you anticipate a decrease in taxable income between 2024 and 2025, you should defer end-of-year bonuses and IRA distributions. However, if you anticipate an increase in taxable income between 2024 and 2025, you can consider accelerating your income into the current year. These are all options our team can help you sort through during a holistic review of your financial and life plans for the coming year.
4. Consider Roth Conversions
You can convert all or part of your IRA to a Roth IRA. The transferred funds will be included as taxable income for the year, but they gain the potential to grow tax-free in the future. The tax benefits of the Roth IRA carry over to your beneficiaries upon inheritance.
This strategy can be especially helpful in lower income years and is important to coordinate with your overall financial plan.
5. Maximize Contributions to Tax-Advantaged Accounts
If your goal is to maximize your retirement savings in tax-advantaged accounts, it is important to understand the various deadlines. Employer sponsored retirement plans typically have a contribution deadline of the calendar year, but traditional/Roth IRA contributions can be made up until the April tax filing deadline of the following year. For Self-Employed individuals, the deadline for SEP IRA contributions is the actual filing of your tax return.
If you were covered by a high-deductible health plan throughout the year, you also have the opportunity to contribute to a Health Savings Account (HSA). Contributions to HSAs are tax deductible in the current year, grow tax deferred, and can be withdrawn tax-free if used for qualified medical expenses. The deadline to contribute to an HSA is the April tax-filing deadline of the following year. Selection of health care plans typically happen toward the end of the year for the following year. It can also be important to consider if these types of plans would fit your financial situation going forward.
For those planning for education expenses, either their own or those of a family member, consider contributing to a 529 College Savings Plan. Funds in a 529 plan grow free of federal, state, and local income taxes if used for qualified educational expenses. Distributions for K-12 education are limited to $10,000 per year, but distributions for college and beyond have much higher limits. Under certain state laws, such as Pennsylvania, contributions to a 529 plan can provide a state income tax deduction. Under the SECURE Act 2.0, funds in a 529 plan may also be eligible to roll into a Roth IRA.
6. Energy Tax Credits
Investing in green technology continues to offer attractive tax incentives. The Inflation Reduction Act of 2022 included new and expanded tax credits for qualified energy-efficient home improvements as well as electric vehicles. If you’re planning on home upgrades, such as installing solar panels or energy-efficient windows, completing them by year-end could secure additional tax savings and potentially reset the credit for the following year.
7. Check Your Estimated Tax Payments
In thinking of ways to reduce your overall tax liability, one of the first places to start is avoiding unnecessary interest/penalties. As you approach the end of the year, it is important to review your estimated income and associated tax liability. This is especially important for those with significant investment income or other non-salaried income sources. The final estimated tax payment for 2024 is due on January 15, 2025.
8. Connect with a Financial Advisor for Personalized Guidance
This checklist offers general guidance, but individual planning will vary based on your financial goals. To ensure that you are making the appropriate planning choices not only on an annual basis, but also year to year, it is important to understand your holistic financial plan.
Our team at Fairman Financial is ready to help you develop, prioritize, and execute that plan throughout the year.
About Fairman Financial
Fairman Financial is a fee-only financial planning firm located in Chesterbrook, PA, offering wealth management, investment advisory, tax and personal accounting services to individuals and families. Investment advisory services are provided by The Fairman Group LLC, an independent investment advisor registered with the Securities and Exchange Commission.
