Top 7 Proven Strategies to Slash Your Taxes Before Year-End

Don't pay more taxes than necessary—explore these essential strategies to reduce your tax liability before the calendar flips.

As the year wraps up, it's crucial for taxpayers to review their income, deductions, and credits, then take action to minimize their tax obligations.

Here are seven practical steps you can take now to lower what you owe the IRS and potentially boost your refund.

Key Insights

• With the significant increase in the standard deduction under the 2017 Tax Cuts and Jobs Act, itemizing deductions may not always be advantageous.
• Nonetheless, multiple tactics exist to decrease your taxable income effectively.
• Ensure all charitable donations are well-documented to qualify for deductions.
• Consider postponing deductions that aren’t currently beneficial.
• Strategically timing capital gains and losses and selecting the right cost basis can help reduce tax exposure on investments.

Start by Estimating Your Taxable Income

Calculate your expected taxable income, including wages, investment returns, side business earnings, pensions, and other income sources.

Next, determine whether taking the standard deduction or itemizing deductions better suits your financial situation. Since 2018, the standard deduction has increased substantially, often making it the better option.

For 2024, the standard deduction amounts are:

• $14,600 for single filers and married filing separately
• $21,900 for heads of household
• $29,200 for married filing jointly and surviving spouses

Keep in mind, the SALT deduction cap of $10,000 ($5,000 if married filing separately) limits deductions for state and local taxes, influencing the decision to itemize, especially in high-tax states.

If itemizing seems beneficial, review the following strategies to lower your tax burden.

Quick Fact

The IRS adjusts the standard deduction annually to keep pace with inflation.

1. Secure Written Proof for Deductions

Obtain receipts for all charitable donations. The IRS mandates written documentation for deductions exceeding $250.

Donations must be itemized on Schedule A with proper substantiation to qualify.

For non-cash gifts valued over $500, include Form 8323 with your tax return. The deductible amount equals the charity’s sale proceeds of those items.

If the charity hasn’t sold the items by year-end, you must wait until the sale to claim the deduction. Refer to IRS guidelines on substantiating non-cash contributions for details.

2. Consider Deferring Deductions

If itemizing isn’t advantageous this year, delay significant charitable contributions until the next tax year to increase the likelihood of itemizing then.

This strategy also applies to unreimbursed medical expenses and other deductible costs where timing is flexible. Medical expenses over 7.5% of adjusted gross income (AGI) are deductible for all taxpayers.

Note: Charitable gifts made with a credit card in December are deductible for that year, even if paid off later.

Alternatively, Accelerate Expenses

If you expect to itemize this year but not next, pay deductible expenses now to maximize deductions for the current tax year. Examples include charitable donations, estimated state taxes, medical bills, and property taxes.

3. Strategically Time Capital Gains and Losses

Coordinate with a tax advisor to plan the sale of appreciated or depreciated securities for optimal tax impact.

Long-Term vs. Short-Term Gains

Long-term capital losses (securities held over one year) offset long-term gains, while short-term losses offset short-term gains. Calculate net gains or losses accordingly.

Ensure all trades are completed by the last business day of December to count for the current tax year.

You can deduct up to $3,000 in net capital losses against ordinary income annually, carrying forward excess losses to future years.

Important Reminder

The IRS Wash Sale Rule prohibits repurchasing the same security within 31 days of selling it at a loss to claim the deduction. This strategy cannot be used at year-end.

4. Select the Optimal Cost Basis

Choosing the right cost basis method can significantly affect your taxable gains. For example, using shares purchased at a higher price for cost basis can reduce taxable gains.

Consult a tax professional to navigate the complexities of cost basis selection.

Donate Appreciated Shares

Donating appreciated securities held over a year to charity allows you to deduct their full fair market value while avoiding capital gains taxes.

This method can be a tax-efficient alternative to cash donations, easing your holiday budget.

Financial institutions now provide detailed cost basis information, simplifying reporting.

5. Realize Income When Advantageous

If your income is lower than expected, consider selling appreciated assets or converting traditional retirement accounts to Roth IRAs to utilize tax credits and deductions effectively.

This approach can reduce or eliminate tax liabilities on gains or conversions by offsetting them with available deductions.

6. Maximize Retirement Contributions

Boost your IRA or employer-sponsored retirement plan contributions if you anticipate a higher tax bracket this year.

IRA contributions are allowed up to the tax filing deadline in April, but 401(k) and 403(b) contributions must be made by December 31.

If you are 50 or older, take advantage of catch-up contributions to increase your tax benefits.

7. Prepay Next Year’s Expenses

Business owners and professionals can purchase necessary items before year-end to deduct the expenses this year, reducing taxable income.

This strategy is particularly impactful for significant purchases.

Summary

By proactively managing income, deductions, and investments before year-end, taxpayers can minimize their tax burden effectively. Stay informed about eligible deductions and consult professionals to optimize your tax strategy.

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