Take these tax actions before the end of 2024 to maximize your tax refund in 2025

This could seem as if the year 2024 will last forever, but there are only a few weeks left before we turn the calendar to 2025. If you are lucky enough to have some quiet time during the December holidays, this may be the perfect time to Evaluate your financial situation and make changes to increase your tax refund (or reduce your tax liability) before filing your tax return in 2025.

These tax strategies could help you reduce your tax burden, but you will need to act quickly, as some steps require preparation before December 31, 2024.

Learn more: Best tax software

It’s worth taking the time to review your tax situation now, because a little effort now could pay off big later. Read on for end-of-year tax tips that will help you prepare for the upcoming tax season.

1. Check your paycheck for tax withholding

The United States has a “pay-as-you-go” income tax model, which is why your employer withholds money from your paycheck and self-employed people must pay estimated taxes every quarter. Not paying enough taxes during the year can result in a penalty at tax time.

Your employer determines the amount withheld from your paycheck using your W-4 tax form, which includes your filing status and estimated tax deductions. The end of the year is the perfect time to review your W-4 and current withholding to decide if you want to change it.

The IRS’s Tax Withholding Estimator tool allows you to estimate your current withholding and projected tax refund to adjust your Form W-4. You can submit an updated Form W-4 to your company at any time, and your employer must implement your changes before the start of the first pay period, which is 30 days or more after your W-4 submission.

2. Sell all losing stocks to offset your capital gains

2024 was a huge year for stocks — the S&P 500 index rose 30% — but many stocks still lost money this year. A positive aspect of potential inventory losses is the ability to practice “tax loss harvesting.”

This tax strategy works by realizing losses or selling your stocks and assets that have lost value, to offset other capital gains you may have earned. For example, if you made $25,000 in profit on a real estate sale in 2024 but lost big on an investment in a struggling stock (like Intel), you can sell your securities and subtract the financial loss from that investment. of your capital gains. If you have $25,000 in stock market losses, you will offset the $25,000 you gained from the real estate sale to eliminate this tax burden.

Capital gains include any income you earn from the sale of assets, such as stocks, real estate, cars, furniture or other tangible property, but you must actually sell assets to realize losses and offset the gains.

3. Maximize contributions to your retirement account

Retirement fund like 401(k) accounts and IRAs offer one of the most productive tax deductions because you can lower your tax bill while building a nest egg for the future. If you can afford it, maximize your possible contributions to any retirement account before the end of the year.

The deduction limit for 401(k) contributions for 2024 taxes is $23,000, and that doesn’t count. not count employer contributions. A worker in the 24% tax bracket could reduce their tax bill by almost $5,000 simply by saving money for the future. Increase the percentage of your regular 401(k) contribution for the final pay periods of 2024 to make the most of your potential retirement deductions.

If you’re over age 50, you can contribute more to your 401(k) with “catch-up” contributions totaling $7,500 per year (or $30,000 total) in 2024, if allowed by your 401(k) plan. You don’t even have to be “delinquent” on your 401(k) contributions to make additional deferrals in your account.

For IRAs, the maximum tax-deductible contribution amount for 2024 is $7,000, or $8,000 if you’re over 50. The amount you can deduct on your taxes depends on both your income and whether or not you have a job. retirement plan.

4. Make your home more energy efficient

Thanks to the Inflation Reduction Act of 2022, there are major incentives to make your home “greener” in 2024. The law increased the amount of tax credits you can take advantage of to increase efficiency energy of your home. For this fiscal year, the Residential Clean Energy Credit – which reimburses the money needed to install solar panels, geothermal heat pumps, fuel cells and battery storage – is still at 30%.

Tax credits have a greater impact on your tax bill than deductions. While deductions reduce your level of taxable income, tax credits directly reduce the amount of taxes you owe the IRS.

Installing a solar energy system, wind turbine or geothermal heat pump can now earn you 30% of the cost if completed before January 1, 2025. In California, the average cost of a solar installation is $11,563. If you made this average improvement to your home in 2024, you would save $3,467 on your taxes.

Tax credits for energy improvements are not limited to alternative energy. Simply installing new Energy Star certified furnaces and boilers can also result in tax credits, although fewer than for alternative energy. Be sure to check the manufacturer’s tax certification statement, as not all Energy Star certified products are eligible.

5. Do you want to defer a bonus or end-of-year payment?

It’s not always easy to defer payment from your employer, but if you benefit from an end-of-year bonus and are looking to reduce your taxable income as much as possible this year, consider asking your company to pay in January.

Likewise, if you are self-employed or an entrepreneur and want to reduce your taxable income for 2024, consider delaying your bills until December so you don’t get paid until January. You’re just deferring paying income tax on that money until your 2025 taxes are due, so you’ll need to strategize whether this year or the next year would be better for earning that money.

6. Donate to charity now if you want more deductions

If you itemize your tax deductions and want to contribute financially to the causes and groups you support, do so before the end of the year to best reduce your taxable income for 2024. Most taxpayers can generally deduct charitable donations up to 50% of their taxable income.

Before donating to anyone, make sure your contribution will be tax-deductible by searching the IRS tax-exempt organization database. All valid charities and non-profit organizations will also have a tax identification number that identifies them as tax-exempt.

7. Check required minimum distributions from IRA and 401(k) accounts

U.S. tax law requires Americans to begin receiving distributions from their personal or business retirement accounts when they reach a certain age. Starting in 2023, the SECURE 2.0 Act raises this age from 72 to 73, for those who turned 72 after December 31, 2022.

These distributions are required for 401(k) plans, traditional IRAs, profit-sharing plans, and pensions. They are not required for Roth IRAs as long as the owner is alive.

Required minimum distributions, or RMDs, are calculated by adding up all the money in your retirement accounts and dividing by an IRS life expectancy factor. The Securities and Exchange Commission offers a simple calculator that incorporates the latest life expectancy tables from the IRS.

Although your retirement plan administrator is required to follow tax laws regarding RMDs, it’s up to you to make sure you receive the correct amount. If you don’t meet the required amount for your RMD, you’ll face the toughest IRS penalty around. The excise tax on failed RMDs was 50% in the past, but the SECURE 2.0 Act reduces that penalty to 25%, and even to 10% if the RMD is corrected within two years.

However, if you were to withdraw $20,000 in 2024 but only received $10,000, you may have to pay a penalty of $2,500. It’s definitely worth checking your RMD for 2024 and withdrawing more money if necessary.

8. Consolidate your medical expenses over a year

Medical expenses can be a significant deduction for many taxpayers, but the IRS only allows you to deduct expenses that exceed 7.5% of your AGI. For example, if your AGI is $50,000 and you spent $5,000 on medical expenses, you can deduct $1,250 ($5,000 – ($50,000 x 7.5%)) from your taxable income.

For this reason, it may be beneficial to consolidate all of your large medical expenses into a single year. These expenses can include surgeries, preventive care, hospital visits, dental care, prescription drugs, glasses, hearing aids, and mental health care like therapy, as well as transportation costs. to and from providers.

If you’re approaching 7.5% of AGI in medical spending this year, consider doing as much of your health-related purchases as planned by the end of December. Get your teeth straightened, buy those new glasses, or schedule elective surgery by the end of 2024, and you’ll maximize your medical deductions.

Likewise, if you’re not near the 7.5% AGI threshold for medical expenses in 2024, wait until January for any non-emergency health-related purchases, when they may be more favorable for taxes on next year’s income.

9. Strategize your business expenses

If you are self-employed or self-employed, deduct your business expenses can save you a lot of money in taxes. Depending on how much you’ve already spent on professional work this year, you might consider prepaying next year’s expenses before the end of 2024 to reduce your tax burden.

For example, instead of purchasing supplies one month at a time, you could order and pay for supplies in December 2024 that you will use for several months of 2025. The timing of your deductions may depend on whether or not you use the cash method of accounting. or on an accrual basis, but charging business expenses for next year is a proven way to reduce your taxable income for the current year.

It is very important to note that everyone’s tax situation is different. These year-end tax tips may work for you, but there is no one-size-fits-all approach to tax preparation. Be sure to consult a tax professional before making any important tax decisions.

To learn more about the 2024 tax season, find out how income brackets and the standard deduction will change in 2025.