As the end of the calendar year approaches, many taxpayers have begun proactive planning measures in an effort to save money and avoid penalties.
While the election outcome has the potential to impact some of those strategies, others are likely to remain impactful regardless of any domino effects triggered at the ballot box. This blog outlines some of the year-end tax strategies worthy of consideration, as well as key deadline dates to keep in mind, before the sun sets on 2024.
Checking Withholding and Estimated Taxes
Given the current interest rates, underpayment penalties for taxes have likely increased in some cases.
A recent Wall Street Journal article pointed out that penalty rates for tax underpayments have reached 8 percent for the first three quarters of 2024, with expectations of approximately 7 percent for the fourth quarter. Just two years ago the rate was 3 percent, according to the Bradford Tax Institute.
These are the highest rates since 2007, creating potential financial pitfalls for those who don’t plan accordingly. For 2024, taxpayers must pay at least 90 percent of their owed tax well before the April deadline.
The deadline falls on December 31 for employees and others who have taxes withheld, while those paying quarterly estimated taxes have until January 15, 2025.
For employees with fluctuating income due to bonuses or investment gains, it might be a good idea to evaluate paycheck withholding or quarterly payments. The IRS provides a tax withholding calculator to help determine the correct amount. Many third-party websites also offer free calculators that some users may find easier to navigate.
Understanding Deductions and the Standard Deduction
With the standard deduction reaching $29,200 for married filers and $14,600 for single filers in 2024, it’s possible that fewer taxpayers will itemize this year.
Many taxpayers will want to determine if it makes sense to accelerate deductions or defer income, potentially allowing them to minimize their tax liability.
In some cases, employers may allow their employees to defer bonuses into a future year. Additionally, select retirement plans may also allow for tax deferment.
Planning Withdrawals from Inherited IRAs
In August, the IRS issued guidance on Required Minimum Distributions (RMDs) for non-spouse heirs of traditional IRAs, clarifying when heirs need to start taking distributions.
For heirs of traditional IRAs whose original owners died in 2020 or later, most accounts must be fully withdrawn within 10 years. However, if the original owner was already taking RMDs, heirs are now required to take them too, starting in 2025.
This is relevant for many high-wealth taxpayers because waiting until the final year could result in a large distribution that pushes heirs into a higher tax bracket.
Maximizing Energy Credits
Thanks to expanded incentives, tax credits are now available for home energy improvements like solar panels, heat pumps, and energy-efficient windows. Tax credits differ from deductions in that they typically reduce taxes on a dollar-for-dollar basis.
The Residential Clean Energy Credit covers up to 30 percent of eligible home improvements, and with no annual or lifetime maximum, taxpayers installing solar panels or geothermal systems may be able to benefit from significant savings.
For those considering an upgrade, it might be a good idea to act sooner rather than later, as additional state or utility incentives may be available.
Conclusion
Year-end tax planning isn’t just about avoiding penalties, it’s also an opportunity for taxpayers to keep their hard-earned money.
With high underpayment penalties, evolving rules on inherited IRAs, and valuable energy credits, taking action before December 31 could make a significant difference.
Sources:
“Cut Your 2024 Taxes Before It’s Too Late,” Oct. 25, 2024
https://www.wsj.com/personal-finance/taxes/2024-taxes-ira-rules-fbd713ee
“Ouch! The Estimated Tax Penalty Is at a 16-Year High,” February 2024
https://bradfordtaxinstitute.com/Content/Estimated-Tax-Penalty.aspx
“Required minimum distributions for IRA beneficiaries” Aug. 22, 2024
https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries
“IRS provides tax inflation adjustments for tax year 2024,” Nov. 9, 2023
https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
“Residential Clean Energy Credit,” Aug. 25, 2024
https://www.irs.gov/credits-deductions/residential-clean-energy-credit
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