Year-End Tax Strategies

2024 is quickly coming to a close, and that means it's an ideal time to optimize your taxes. Moves like maximizing retirement contributions, harvesting losses, or planning Roth conversions can help you reduce your taxable income and improve your overall financial health. Look into these year-end tax strategies to lock in savings before 2025 begins.

Maximize Retirement Contributions

If you are participating in an employer sponsored plan, such as a 401(k), maximize your retirement contributions to reduce taxable income. Doing so reduces taxable income because contributions are made pre-tax, lowering your adjusted gross income. This reduces the income subject to federal (and sometimes state) taxes, potentially putting you in a lower tax bracket.

As David Kindness at Investopedia explains, "Contributions to your employer-sponsored plan are commonly tax-deferred, where your annual taxable income is reduced by the amount you contribute. However, distributions at retirement are taxed, but you'll likely be in a lower tax bracket as a retiree. If your tax filing status is 'single,' your taxable income for the year is $31,000, and you contribute $2,000 to your 401(k) account, your taxable income will be reduced to $29,000. For 2024, the annual individual contribution limit, set by the Internal Revenue Service (IRS), to a 401(k) plan is $23,000. If you are 50 or older, you can make an additional catch-up contribution of $7,500."¹
 

Consider a Roth IRA Conversion

You may want to consider a Roth IRA conversion as part of your year-end tax strategy. When you convert traditional IRA funds to a Roth IRA, you'll pay taxes on the converted amount now, but you'll lock in current tax rates. Future withdrawals, including earnings, will then be tax-free in retirement. Be sure to evaluate your tax bracket, avoid bumping into a higher one, and pay taxes with non-retirement funds. This strategy can be ideal for those expecting higher taxes later. If you choose to go this route, do so before the end of the year.

Reduce or Eliminate Capital Gains with Tax-Loss Harvesting

Try reducing or eliminating capital gains with tax-loss harvesting. This offsets capital gains by selling underperforming investments at a loss. These losses can offset gains dollar-for-dollar. You can deduct up to $3,000 of excess losses against ordinary income, and carry forward unused losses to future years. Identify losing investments, sell to realize losses, and reinvest carefully to avoid the "wash-sale" rule (buying back the same investment within 30 days).

If Retired, Take RMDs by the End of the Year

If you are retired, take any Required Minimum Distributions (RMDs) by December 31st to avoid a penalty. RMDs are the minimum amount IRA or retirement account owners must withdraw annually, starting with the year you reach age 73. Missing the deadline will lead to a 25% penalty on the amount not withdrawn, though this may be reduced if quickly corrected. Calculate RMD by using the IRS formula based on age and account balance, automate distributions, and consider qualified charitable distributions to satisfy RMDs tax-free.

Take Advantage of the 2024 Annual Gift Exclusion

Take advantage of the annual gift exclusion and make your gifts by December 31st. The annual gift exclusion for a taxpayer to avoid paying gift taxes for 2024 is $18,000 per recipient. The IRS has more information on gifts here.

American Bank is a community bank, and we pride ourselves on earning the trust of our clients through building long-term relationships. We have a deep financial knowledge specific to our community and will utilize that to help you figure out your year-end tax strategies. We look forward to servicing your banking needs!