With year-end approaching, it is time to start thinking about moves that may help lower your personal tax bill for this year and next. Whether or not proposed tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest-income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all of them will apply to you, but you or a family member may benefit from many of them. We can meet to identify specific actions for you.

  • Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

    As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer’s estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.
  • The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above.

    Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax.

    There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.

  • Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $94,050 for a married couple for 2024).

  • Postpone income until next year and accelerate deductions into this year if doing so will enable you to claim larger deductions, credits, and other tax breaks for this year that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.

    Note, however, that in some cases, it may pay to actually accelerate income into this year. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year.
  • If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA this year if eligible to do so.

    Keep in mind that the conversion will increase your income this year, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.

  • It may be advantageous to try to arrange with your employer to defer until early next year a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest-income individuals.

  • Many taxpayers won’t want to itemize because of the high standard deduction amounts that apply for 2024 ($29,200 for joint filers, $14,600 for singles and for marrieds filing separately, $21,900 for heads of household), and because many itemized deductions have been reduced or abolished.

    Like last year, no more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met.

    You can still itemize medical expenses but only to the extent they exceed 7.5% of your adjusted gross income, state, and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won’t save taxes if they don’t cumulatively exceed the standard deduction for your filing status.

  • Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good.

    For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2022 and 2023. For 2022-2025, the deduction for charitable contributions of individuals is limited to 60% of the contribution base (generally, AGI).

  • If you expect to owe state and local income taxes when you file your return next year and you will be itemizing this year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into this year.

    Remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not good to the extent it causes your state and local taxes paid this year to exceed $10,000.

  • If you were 72 or older this year you must take a required minimum distribution (RMD) from any IRA or 401(k) plan (or other employer-sponsored retirement plan) of which you are a beneficiary. Those who turn 72 this year have until April 1 of next year to take their first RMD but may want to take it by the end of this year to avoid having to double up on RMDs next year.
  • If you are age 70 or older by the end of this year, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making charitable donations via qualified charitable distributions from your IRAs by the end of the year. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction.

    The IRA qualified charitable distribution also allows distributions to charities (up to $50,000) through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.

  • If you are younger than age 70 at the end of the year, you anticipate that you will not itemize your deductions in later years when you are 70 or older, and you don’t now have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs this year.

    If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs this year. Then, in the year you reach age 70, make your charitable donations by way of qualified charitable distributions from your IRA. Doing this will allow you to in effect convert nondeductible charitable contributions you make in the year you turn 70 and later years into currently deductible IRA contributions and reductions of gross income from later year distributions from the IRAs.

  • Take an eligible rollover distribution from a qualified retirement plan before the end of the year if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes you owe this year. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in this year’s income, but the withheld tax will be applied pro rata over the full tax year to reduce previous underpayments of estimated tax.

  • Consider increasing the amount you set aside for next year in your employer’s FSA (Flexible Savings Account for medical expenses) if you set aside too little for this year and anticipate similar medical costs next year.

  • If you become eligible by December to make HSA (health savings account) contributions, you can make a full year’s worth of deductible HSA contributions for the current year.

  • Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $18,000 made in 2024 (increased from $17,000 in 2023) to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the “kiddie tax.”

  • If you were in a federally declared disaster area and you suffered uninsured or unreimbursed disaster-related losses, keep in mind that you can claim them either on the return for the year the loss occurred or on the return for the prior year, generating a quicker refund.

  • If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in the current year to maximize your casualty loss deduction this year.
These are just some of the year-end steps that can be taken to save taxes. Contacting us so we can tailor a plan that will work best for you.