Year-End Tax Planning: Maximize Savings and Minimize Surprises
As the year draws to a close, many of us are juggling holiday plans, year-end tasks, and financial check-ins. Amid the bustle, tax planning might not be top of mind—but it should be. Taking a proactive approach to your taxes in the fall and winter months can uncover opportunities to save money, ensure compliance, and set you up for a smoother tax season next year. Let’s dive into why now is the perfect time to address key tax considerations like withholdings, contributions, and strategic moves such as Roth conversions.
The end of the year is an ideal time to assess whether your tax withholdings are on track. If you’ve experienced significant changes this year—such as a new job, a salary increase, or life events like marriage, divorce, or having a child—your current withholdings might not reflect your true tax liability. Work with your tax professional or financial advisor to review your withholdings now, so there are no surprises come spring time.
Retirement account contributions are not just a tool for future financial security—they also offer immediate tax benefits. If you’re falling short of the contribution limit maximum of $23,000 this year ($30,500 for 50 and older), consider increasing your 401(k) deferrals for your last few paychecks. Contributions must be made by December 31.
Roth IRA conversions are a powerful strategy for those looking to secure tax-free growth and distributions in retirement. Conversions involve moving funds from a traditional IRA to a Roth IRA and paying taxes on the converted amount. Given that we have some more clarity on future tax implications post election, it could be a good time to discuss your Roth conversion strategy with your financial professional. Keep in mind tax bracket management when thinking about a conversion. Work with your advisor to ensure the conversion amount doesn’t push you into a higher tax bracket.
Next, for those inclined to give, year-end charitable donations can help you reduce your taxable income while supporting causes you care about. Also, If you’ve had investments that underperformed this year, tax-loss harvesting allows you to sell them to offset gains in other areas of your portfolio. This strategy can lower your taxable income and free up cash for rebalancing your portfolio, and allowing you to capture a carry forward loss that can be used on your tax return in years to come. Lastly, if you have an FSA for healthcare or dependent care expenses, check your balance and eligible expenses. Many plans have a “use-it-or-lose-it” rule, though some offer a grace period or allow limited rollovers.
While these are just a few reasons and examples of tax planning ideas to identify, year-end tax planning isn’t just about reducing your tax liability for this year—it’s about taking a proactive approach to secure your financial stress in the spring. By addressing issues like withholdings, retirement contributions, Roth conversions, and charitable giving now, you can minimize surprises in April, maximize your tax savings, and start the new year on solid financial footing.
Take the time now to meet with your financial advisor or tax professional to identify opportunities specific to your situation. If you have any questions on your specific financial situation or are looking for ways to think about tax related financial strategies between now and year end, email info@shermanwealth.com or schedule a complimentary intro call here.