Personal Finance

Forgetting These Tax Moves Could Cost You Thousands Next Year

John Seetoo

Published: December 16, 2024 1:45 pm

24/7 Wall Street Key Points

• Most tax loopholes and savings strategies must be conducted and completed before December 31st to be valid.
• Neglecting to effectively use tax savings strategies can result in thousands of dollars in taxes incurred and due that could have been prevented. 
• Making tax savings strategies part of a regular financial management protocol as opposed to a last minute afterthought, can exponentially increase liquidity for retirement savings, 529 plans, health plans, and other plans. 
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While the dreaded April 15th tax filing deadline is still months away, it is easy to overlook the fact that the vast majority of tax saving measures must be completed before the end of December. Depending on one’s financial circumstances, foregoing some of these strategies can result in thousands of dollars of taxes incurred that could otherwise be avoided. Since there is no requirement to pay more than one’s minimum legally required taxes, tax moves such as the ones listed below should definitely be considered and evaluated for applicable value by anyone who is not feeling especially generous towards the IRS. The three general categories that these strategies can be grouped into are:

• Deductions and Credits
• Timing Strategies
• Tax Deferrals

The following are some, but not all of the strategies and tips worthy of review by most taxpayers.

Deductions and Credits

• Medical Deductions – Provided the filer exceeds the minimum threshold, medical deductions can reduce taxes significantly. Unless one has a chronic medical condition, medical deductions may be overlooked when an unforeseen health issue occurs. 
• Interest Expenses – Although limited to 30% of EBIT (earnings before interest and taxes), interest on loans can legitimately be deducted to reduce net taxable income, possibly aiding to lower one’s tax bracket.

• Municipal Bond Interest – Coupon payments from municipal bond holders are structured to be exempt from federal and state taxes. In cities like New York, NY municipal bonds are triple-tax free. As such, it is important to segregate municipal bond income from other income subject to taxes. 
• Tax Credit Claims – Legitimate tax credit claims are applied directly against taxable income to further lower one’s net taxable income. Credits can include the Child Tax Credit, Earned Income Tax Credit, and other tax credits that may concern education, homeowner’s tax credits, or other credits, as applicable. 

Timing Strategies

Capital Gains Declarations – If one has the flexibility to choose when to sell property, securities, or any other assets at a profit, they should look at dividing sales between different years. This can not only lower total capital gains for each year, but can potentially reduce one’s tax bracket. 

• Capital Gains Duration – Be aware that capital gains on assets held under a year are taxed as income as opposed to at lower capital gains rates. If selling part of an accumulated stock position, for example, it behooves one to use the earliest acquisition date to prospectively qualify for the capital gains rate if the sell registers a profit. 

• Installment Payments – One can break up sales proceeds into installment payments if they wish to have some of it declared in the following year. 
• Tax-Loss Harvesting – Concurrently with scheduling one’s capital gains, amassing tax losses for calculating against the larger gains declared can further lower net taxable amounts can result in considerable net savings. Some people intentionally will sell a stock if it has fallen in order to generate a loss against other capital gains and will then buy the stock back while it is still low to ride it back up again. 
• Expense Pre-Pays: If one wishes to rack up deductible expenses against gains in a given tax year, pre-paying some bills in advance can help to facilitate this. The 12-month limit applies, so any deductible expense that is prepaid cannot be incurred or billable beyond 12-months from the date of pre-payment. 
• Income Deferrals – Similar to timing a sale for capital gains declarations, one can exercise some discretion over gross income declarations in a given year by using several techniques, such as:

1. 1. Collections – Sending invoices in December for January collection moves taxable income declaration to the following year.
   2. Compensation & Bonuses – If one wants to reduce their income for the current year, one can request their employer to schedule bonuses and additional compensation for payment in January so it registers the following year.
   3. Stock Warrants and Options – Warrants and Options only trigger taxable events when exercised and the underlying stock is sold, so there is no need to declare any unexercised warrants or options that may be earned as part of compensation as income.

• Charitable Donations – All donations to registered charities and houses of worship qualify for charitable deductions. In addition to monetary donations, the market value of personally owned assets and property also can be deducted if donated. This can include real estate, vehicles, equipment, art, furniture, clothing, etc. in addition to registered securities and jewelry. 
• Bequeathing Assets to Step Up Baseline Values – Leaving one’s heirs appreciated securities and other assets in a will effectively wipes out any capital gains taxes upon the testator’s demise. The IRS will “step up” the valuation on the assets to their current market value, so those valuations become the new cost basis for any subsequent capital gains assessments should those assets be sold in the future. 

Tax Deferrals

• Social Security – As Social Security benefits are taxable as income, one should try to file when one is in a lower bracket. Additionally, the later one files, the larger the qualified benefit amount.
• 401-K and IRA Plans – Maxing out these plans allows one to lower their taxable base amounts while saving for retirement. While they are taxed upon withdrawal, sufficient retirement planning structures should account for one being in a lower tax bracket by the time withdrawals or RMDs (Required Minimum Distributions) commence. 401-K plans usually include employer contribution matching, which adds to one’s tax deferred income. 
• HSA and 529 Accounts – Health Savings Accounts and 529 Education Fund accounts are also tax deferred. The former incurs zero tax if use of proceeds are solely for health and medical services and fees. 529 accounts are usually established for children’s college funds, although they may also be used for vocation schools and other qualifying educational purposes. 
• Roth Conversions – Converting the pre-tax funds in an IRA or 401-K account to a Roth version entails paying the tax now as income in order for future capital gains to grow tax-free by the time of withdrawal. Roth conversions can be conducted incrementally in order to stay below the next tax bracket threshold and to remain within one’s budget and financial planning structure.

Starting a Business

If one has a side hustle or hobby, it may be worth establishing as an actual business, especially as one’s age approaches retirement. Establishing another business prior to retirement with the IRS can justify the lower tax bracket post-retirement, thus reducing tax percentages. The IRS permits a company to take losses for 3 out of 5 years before declaring it a hobby or not. That gives a 5 year flexibility period  in deciding whether or not to close it down or to declare some profits in future years if warranted. 

This article should be construed solely on an informational basis. A professional accountant and tax specialist should be consulted if more in-depth tax counseling is being sought.