The hustle and bustle of the holidays can make anyone lose sight of their finances. Before ringing in the new year, it’s a good idea for savers and retirees to evaluate their holdings and tax strategies. A few last-minute moves before December 31 can yield significant savings in the upcoming tax season. Here are a few impactful ways to improve your financial standing by year-end.
Utilize Annual Gift Tax Exemptions
In 2024, individuals can gift up to $18,000 without incurring a tax on that money. For married couples filing jointly, the amount doubles to $36,000. This exemption can reduce a taxable estate while allowing benefactors to share their wealth with loved ones. It doesn’t matter if the money goes to one or more than one party. For example, if a married couple filing jointly wishes to gift $18,000 to each of two children in the same tax year, they will not owe tax on that gift as long as it is within the following parameters for gift splitting:
- Both spouses must agree to the gift and specify the reason for the gift on their tax return.
- The benefactors are responsible for filling a Form 709 with the Internal Revenue Service (IRS).
- Couples must either give the money from a joint account or individually write checks within the individual limitations (up to $18,000 from each spouse) from their separate accounts.
For individuals wishing to give a larger sum than the $18,000 annual limit, a gift of $18,000 in December 2024, followed by another gift of equal value early in 2025, accomplishes that goal. An estate plan that leverages these gifts can minimize estate tax liabilities when transferring assets to heirs in the future. While these stipulations cover strategies for annual giving, the lifetime threshold for tax-free gifting as of 2024 is $13.61 million. Benefactors should be aware of additional tax exemptions on gifts, including those given to spouses, political organizations, tuition payments, and medical expenses. A qualified financial advisor can provide further details about special considerations surrounding gifts and tax-savvy ways to do it.
Explore Tax-Loss Harvesting
Tax-loss harvesting can offset gains and reduce taxable income to improve an underperforming portfolio. This practice of selling investments at a loss before the end of the year allows investors to claim capital losses on the upcoming tax return. Not only do those losses counter capital gains, but if the losses exceed gains, individuals can claim up to $3000 of the excess loss to lower taxable income. The second part of smart tax-loss harvesting involves reinvesting the proceeds from the underperforming asset sale in a similar assortment of stocks, bonds, or other tradable securities to maintain a stable portfolio position consistent with an individual’s financial goals. The IRS has an important restriction concerning tax-loss harvesting known as the “wash-sale rule.” This stipulation prohibits investors from selling or trading a security and purchasing another “substantially similar one” within 30 days before or after the sale. Those who violate the rule cannot claim the loss on their upcoming tax return. The regulation prevents investors from exploiting capital losses to their benefit at tax time.
Maximize Retirement Contributions
Those who are behind or wish to contribute more to their retirement savings can maximize their contributions to 401(k) and individual retirement accounts (IRAs) before the end of the year. Participants should use this opportunity to reduce their taxable income. The money individuals put into these accounts this year is tax-deferred and deductible on the following year’s return, reducing the amount due to the IRS. The 2024 contribution thresholds are as follows:
- 401(k)—$23,000 with a catch-up contribution of up to $7,500 for people ages 50 and over
- Traditional IRA—$7,000 with a catch-up contribution of $1,000 for individuals age 50 plus.
Roth IRAs do not come with an upfront tax benefit, but there is a major long-term advantage to maximizing contributions: compound growth. Reinvesting earnings from contributions enables them to grow exponentially with time, and each contribution compounds tax-free. Additionally, eventual withdrawals in retirement are tax-exempt.
Consult a Financial Advisor
Ultimately, the goal for investors should be to optimize their financial strategies to build wealth and minimize their tax burden. Conferring with a financial advisor can avoid missteps that work against that objective and result in penalties. The holiday season is the perfect time to gift yourself peace of mind, knowing that you have done all you can to solidify your financial position this year in preparation for next year and those that follow.
At SHP Financial, we specialize in designing personalized tax and retirement strategies for our clients. Let us help you close the year with a complimentary review of your finances. Contact us today.
