It’s hard to believe we are closing in on the last quarter of 2024. If you go into a Costco, they are promoting Christmas in September! While you may be thinking about how you will celebrate the upcoming holidays, it’s an even better time to make smart moves this year that can lower your tax bill in 2025.
In today’s blog, we’re going to look at three tactics to start your year-end tax planning efforts:
1. Maximize Your Retirement Contributions
- Take Advantage of Tax-Loss Harvesting Opportunities
- Develop a Charitable Giving Strategy
At PAX Financial Group, our San Antonio financial planners specialize in helping individuals, families, and business owners construct comprehensive tax-planning strategies that preserve, nurture, and grow wealth.
Read our latest Quick Guide “Core-satellite Investing in San Antonio”
Following is a simple, step-by-step approach to help you get started on the year-end tax planning process.
Tax Planning Tactic #1. Maximize All of Your Retirement Contributions
One of the easiest and most effective ways to reduce taxable income is to max out your retirement contributions. Your contributions help build your retirement savings while lowering your 2024 taxable income.
For 2024, the IRS has set the following contribution limits for 401(k) and IRA accounts:
401(k) Contribution Limits for 2024:
- Employee Contribution Limit: $23,000
- Additional Catch-Up Contribution (50 and older): $7,500
IRA Contribution Limits for 2024:
- Traditional and Roth IRA Contribution Limit: $7,000
- Additional Catch-Up Contribution (50 and older): $1,000
The Tax Impact on your 2024 Income:
For example, suppose your annual salary is $120,000, and you contribute 13% of your monthly income to your 401(k), which would be $1,300.
- 401(k) Contribution: $120,000 x 13% = $15,600 per year
- New Taxable Income: $120,000 – $15,600 = $104,400
- Estimated Tax: $104,400 x 24% = $25,056
If you didn’t contribute to the 401(k), your taxable income remains the full $120,000. Assuming you are taxed at a 24% federal rate for simplicity, your federal taxes would be:
- Taxable Income: $120,000
- Estimated Tax: $120,000 x 24% = $28,800
In this simple example, maximizing your 401(k) contribution saves $3,744 in taxes for the year.
Considerations for High-Net-Worth Investors:
If you have at least $1 million in liquid or investable assets, including cash, stocks, bonds, and other marketable securities, simply contributing to retirement accounts may not be enough. You might consider opening a backdoor Roth IRA or contributing to other after-tax accounts if you’ve already maxed out your standard contributions.
Consulting with a financial advisor in San Antonio can help you assess how much more you can contribute and what strategies will work best for your financial situation.
Listen to our podcast on “The Impact of Conflicting Thoughts on Investment Decisions.”
2. Take Advantage of Tax-Loss Harvesting
Tax-loss harvesting is a strategy that can help you offset capital gains by selling investments that have experienced unrealized losses. If you’ve made gains throughout the year and plan to realize them, you can sell your underperforming assets to offset some or all of your capital gains taxes on the winners. This strategy can be particularly valuable if you have substantial holdings in taxable accounts as part of a core-satellite investing approach.
Capital gains taxes can drain your wealth, especially if you have a core-satellite portfolio with a blend of tax-efficient ETFs and actively managed investments. By harvesting losses, you can improve the overall tax efficiency of your portfolio and free up cash to invest in higher-quality growth opportunities.
Considerations for High-Net-Worth Investors:
Wealth management in San Antonio becomes even more complex when you have considerable assets. You are likely invested in various asset classes, each taxed differently. The right financial advisor can help identify which assets to sell for losses and reinvest in a way that aligns with your overall strategy while avoiding wash sale rules.
Action Steps:
- Identify underperforming assets in your taxable portfolio.
- Sell investments to offset capital gains before the year ends.
- Work with a financial advisor in San Antonio, TX, to ensure you’re following proper procedures and are not violating wash sale rules.
Tax Planning Tactic #3. Optimize Charitable Giving
Charitable giving is an excellent way to lower taxable income, particularly if you itemize deductions. Donations to qualified charities can reduce your tax bill while allowing you to support causes that matter to you. Whether through direct donations, donor-advised funds, or even gifting appreciated stock, charitable giving is a versatile tool in your year-end tax planning toolbox.
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Donating appreciated stock, for instance, allows you to bypass capital gains taxes while receiving a full deduction for the asset’s fair market value. This can be a great option if you’ve held stock that has appreciated significantly and want to avoid the tax hit that comes with selling it.
Considerations for High-Net-Worth Investors:
Along with traditional charitable donations, you can consider setting up a donor-advised fund (DAF). This option lets you contribute to charity, claim an immediate tax deduction, and then distribute the funds to your chosen charities at your own pace over a select timeline.
A financial advisor familiar with retirement planning in San Antonio, Texas, can help guide you through these options and ensure your charitable giving maximizes tax benefits.
- Review your charitable donations for the year and consider additional contributions.
- If you hold assets with significant appreciation, discuss the benefits of donating stock instead of cash with your financial advisor.
- Look into donor-advised funds for more flexibility in your giving strategy.
Final Thoughts
Year-end tax planning can be complex, especially when you have significant assets to manage. With strategies like tax-loss harvesting, maximizing retirement contributions, and charitable giving, you can make the most of the tax advantages that are available to you.
PAX Financial Group understands the intricacies of aligning your tax strategy with your long-term financial goals. Whether you’re managing a core-satellite portfolio or looking for ways to optimize your wealth management, Pax’s experienced financial advisors in San Antonio can help guide you through these important financial decisions.
By integrating a core-satellite investing strategy, PAX Financial Group helps you balance growth with risk management, using low-cost ETFs as the core of your portfolio while leveraging active strategies in satellite investments. Combined with year-end tax planning, this approach ensures your portfolio is tax-efficient and designed to grow over time.
If you’re ready to make smarter, more strategic decisions with your wealth, contact PAX Financial Group today for personalized guidance to help you keep more of what you’ve earned.
