Top 10 Year-End Tax Planning Strategies for 2024

The end of the year can be a hectic time. Increased personal commitments, such as holiday travel and family visits, are added to already busy work schedules. It's no wonder important year-end tax planning is often overlooked.

While you may be tempted to start tax planning after the new year begins, considering the right tax-saving strategies doesn't have to add to your crowded year-end calendars. Here are 10 straightforward end-of-year strategies for a more successful tax season.

1Donor-advised funds and foundations

You may want to consider making a more-significant-than-usual charitable gift. In addition to fulfilling a philanthropic aspiration, a charitable contribution may provide valuable federal and state tax deductions. Using a private foundation or donor-advised fund, or DAF, can provide greater flexibility than making direct gifts to charities. DAFs enable you to manage the timing of charitable deductions from a tax perspective.

Complex assets—including private and restricted stock and real estate—may also be eligible for charitable contributions to DAFs. Donors avoid paying capital-gains tax on contributions of long-term shares with low basis. Consult with your CPA and DAF manager before making contributions to determine the right option for your situation.

2Use required minimum distributions for charitable contributions

If you're age 70½ or older and receiving required minimum distributions, or RMDs, from an IRA, you can direct your IRA custodian to pay some or all of the RMD to a qualified charity. This is called a qualified charitable distribution, or QCD. By directing the RMD payment to a qualified charity, you exclude the contributed RMD amount from your income.

You don't receive an itemized deduction for the QCD. However, by excluding the income on your return, you're taking an above-the-line deduction—a deduction for adjusted gross income, or AGI—which could lower your tax liability more than if your contribution was considered an itemized deduction.

In 2024, taxpayers can direct up to $105,000 of an RMD to a qualified charity. If you file jointly with a spouse, the spouse can also make a QCD of up to $105,000 from their own RMD. Under the Secure 2.0 Act, the QCD RMD exclusion will be indexed for inflation. Keep in mind you must qualify for all QCD requirements to be eligible for income reduction.

3Make Roth IRA conversions

Year-end tax planning can be especially beneficial to individuals with uneven income streams, providing the opportunity to accelerate or defer compensation. In a lower-than-usual income year, it's often prudent to review existing traditional IRAs and former employer 401(k) plans and work with a tax professional to determine whether a conversion to a Roth IRA would be beneficial.

Conversions require federal and state income taxes in the year of the transaction. However, all principal and earnings could grow income-tax-free from that point on. Some retirement accounts, including Roth IRAs, may allow you to invest in non-traditional private assets, such as fine art and collectibles, and provide an opportunity for substantial tax-free growth. In addition, many people use self-directed IRAs to make private investments.

4Deduct investment interest expenses

The mortgage interest deduction is currently limited to the interest on the first $750,000 of mortgage debt. To take advantage of additional interest deductions and tax deductibility rules, consider using the investment interest expense deduction strategy—especially if your balance sheet normally carries substantial amounts of net investment income. It's important to optimize balance sheet leverage from a tax standpoint and maximize tax deductions, such as investment interest expenses.

5Contribute to self-employed retirement plans

Many individuals use self-employed retirement plans as an opportunity to defer income tax liability. The two most popular plans—the self-employed 401(k) plan and the Simplified Employee Pension, or SEP, IRA—allow for up to $69,000 in contributions in 2024, plus a $7,500 catch-up amount for 401(k) plans of participants aged 50 and over, all pre-tax. There are additional retirement savings options, such as defined benefit and cash balance plans, that allow for significantly higher pretax contributions as well.

6Consider annual gifting and wealth transfers

Consider using your annual gift tax exclusion amount with a non-spouse—$18,000 per donor, per recipient—by funding a custodial account, such as an UTMA or UGMA. Ideally, gifts of low-basis stock to a custodial account could be sold during a more preferential tax bracket environment. Also, gifts to minors can be provided within the gift exclusion amount to fund a traditional IRA or a Roth IRA up to $7,000 per year provided the donee had at least that amount in earned income

Contributions to a 529 college savings plan would also fall into the annual gifting category and can be front-loaded for up to 5 years of the annual gift tax exclusion amount—$90,000 for individuals in 2024—without a gift tax consequence.

7Consider Series I savings bonds

The annual interest rate on Series I bonds purchased May 1, 2024 through October 31, 2024 is 4.28%. The bonds are backed by the federal government and exempt from state and local taxes. Federal taxes can also be avoided if the bonds are used to fund qualifying educational expenses. With the current interest rate environment, it makes sense to revisit with your wealth professional whether or not there are advantages to bond investments.

8Avoid year-end mutual fund investments that include capital-gain distributions

When investing in mutual funds, the timing of your purchase may have unforeseen tax consequences. Mutual funds that make capital-gain distributions—typically in November or December—are taxable if your investment is made before the fund's record date.

When considering a late-year mutual fund purchase, it can be advantageous to make your investment after the fund's distribution eligibility date, thus avoiding the associated taxes. Fortunately, this isn't a problem for mutual fund investments made for tax-deferred accounts such as IRAs.

9Consider 1040 Schedule 1, Part II deductions

In addition to either the standard deduction or itemized deductions, you may be able to take deductions that appear on Schedule 1, Part II of Form 1040. These deductions are available even if you don't itemize your deductions. Some of the more common deductions include:

• Deduction for contribution to a health savings account, or HSA
• Deductible portion of self-employment tax
• Self-employed health insurance deduction
• Alimony—depending on the date of divorce or separation agreement
• IRA contribution—subject to other limitations
• Student loan interest deduction

The deductions that appear on Schedule 1, Part II are considered above-the-line deductions and go into calculating your AGI.

It's important to realize these deductions don't apply to all taxpayers. A review of Schedule 1, Part II should be part of your year-end planning in order to leverage all available deductions.

10Employ tax-loss harvesting

Tax-loss harvesting is another effective tax strategy to consider. When selling a stock or mutual fund position, you may realize a capital loss and potentially deduct up to $3,000 of collective losses against ordinary income—the rest can be used against any capital gains realized in the year. Any unused capital losses could be carried forward into future years indefinitely, providing a valuable tax-management tool.

It's important to be familiar with the wash sale rule when considering this strategy because it may disallow the loss if you re-purchase the same—or a substantially equal security—30 days before or after the sale date.

Section 1244 losses may also be useful if you invested in an early-stage private company and the business closed. Those losses are treated as ordinary losses rather than capital losses on your tax return and could result in a greater tax benefit.

Two extra tax strategies for investors and entrepreneurs

If you're an entrepreneur or investor, you have some unique year-end tax requirements because of the nature of your employment. Here are two additional strategies to help minimize your tax burden.

Exercise incentive stock options

Check with your CPA regarding the opportunity to exercise incentive stock options, or ISOs, without incurring additional tax liability under the alternative minimum tax, or AMT. If you're anxious to get the clock ticking for long-term capital-gains treatment, consider exercising ISOs early next year because any associated AMT may not be due until April of the following year. Be mindful of possible tax changes, including those surrounding equity compensation taxation.

Assess capital gains and losses, including qualified small business stock

Many people assess the opportunity to reduce their capital-gains burden by taking advantage of the qualified small business stock, or QSBS, exemption. This can be beneficial for founders, early employees and investors. If a stock is eligible for the QSBS exemption, you may be eligible for up to a 100% exclusion from the federal capital gains realized from the sale. There are strict requirements for the stock to qualify as QSBS, and the amount of the tax exclusion varies so be sure to bring up the issue with your CPA.

The bottom line

There's a wide range of strategies available to enhance your tax planning, and the final months of the year can be an opportune time to review personal finances to ensure you don't leave potential savings on the table. Working alongside your financial, tax and estate advisors, you can use these end-of-year tax strategies to determine the most effective approaches for your financial plan.