When the majority of people think of the tax calendar, April 15th is often the most important date in their minds. Although Tax Day is an important day for most businesses and individuals, the most important tax decisions are made in the final months of the year. The IRS mandates that every tax return includes all reportable activity from January 1st to December 31st (with some exceptions), so it is crucial that all tax planning strategies are initiated and completed before the end of the calendar year. Some of these strategies could be as simple as making donations to a charity or gifting to your children and grandchildren. It is not as complex as the IRS would make it feel.
As we head into those crucial final months of the year, you may want to discuss the following tax strategies with your preferred CPA or tax expert:
Roth Conversions: In case you are not familiar with the difference between Traditional vs Roth Retirement accounts; with traditional accounts, income that is contributed to the account is not taxed until it is distributed at retirement, while income contributed to a Roth is taxed in the year that you contribute funds, but you are not taxed on the contributions or the growth of the Roth account at retirement. If you have a non-Roth IRA or 401(k), it is possible to convert much, if not all, of those funds to a tax-sheltered Roth IRA. This could allow you tax-free income during those much-deserved years of retirement! It is worth noting, when a taxpayer converts to a Roth, each dollar converted is considered taxable income and could potentially move your household up into the next tax rate bracket, so please consult with your preferred CPA or tax expert before deciding to convert.
Charitable Donations: Many of our clients here at Great Plains value their philanthropic pursuits among their top financial goals. Fortunately, the IRS and US government encourage taxpayers to make contributions and donations to tax-exempt organizations by providing tax deductions for such charitable donations. Donations could include any physical objects or monetary assets that you provided to a qualified charity (you can verify if the organization is qualified at: https://apps.irs.gov/app/eos/). You may have made a qualified donation without even realizing it; this is especially true for those individuals who enjoy tithing or donating household items to donation centers. Regardless, this last-minute IRS deduction allows you to make donations in these final months of the year to lower your tax bracket, while at the same time giving back to the community and organizations that are most important to you and your family. Additionally, if you are worried about RMDs (required minimum distributions), making Qualified Charitable Distributions (QCDs) from an IRA can count toward your annual RMD. Discuss with your preferred CPA or tax expert whether QCDs are available to you or if a last-minute donation could benefit your tax status.
Gifting: Unlike the previous two strategies mentioned, this final strategy does not benefit you, but it could be a great benefit to your children and heirs. Gifting to your children, grandchildren, or other loved ones is a way to transfer wealth without passing along any tax consequences. In the current tax year 2024, the IRS allows an unreportable gift of $18,000 ($36,000 if from a married couple) per recipient to an unlimited number of recipients. If you are someone with a new child or grandchild in the current year, the gift could be placed into an education fund, wedding fund, or retirement fund without your loved ones ever needing to worry about taxes. Another reason could be large life purchases such as assisting adult loved ones in buying a house or a car. Before the year end, discuss with your CPA or tax expert the possibility of sharing your wealth with loved ones without having to share the burden of taxes.
