As another year ends, there are a few tasks we should all consider completing.
Some of the tasks have penalties assessed if they are not completed on time and others just lead to a lost opportunity if the deadline is missed. I missed a big opportunity the year I retired when I didn’t realize my taxes owed that year would be zero. If I had made the discovery before December 31st, I could have made Roth conversions without paying any taxes. What an opportunity loss that was.
Look over the list and be sure you accomplish all the items that pertain to your situation. You will be glad you did.
1: Estimate your total income
I messed this up the year I retired. Since I earned almost no W2 income, I expected to owe very little taxes. I never dreamed it would be zero. Calculate what you have earned so far this year and estimate what you expect to earn before the end of the year. Don’t forget estimated bonuses.
Make sure to pay enough taxes for the income you anticipate. If you underpay too much you will end up owning interest and penalties. If you expect a year-end bonus, you can ask payroll to take additional federal and state taxes from your final check to get close to your actual tax bill. If you pay quarterly estimated taxes, you can adjust the fourth quarter payment.
Never let yourself get into a position where you owe money to the IRS. They are very difficult to deal with and clearing up your back debt to them is a cumbersome task.
If you were way off in paying taxes, go to payroll and modify next year’s payroll tax withholding so you won’t have the same problem again.
2: Maximize your retirement plan contributions
High tax bracket earners have an opportunity to make an investment that can earn as high as 50% guaranteed interest instantaneously when they contribute to their retirement plan. That is almost impossible to beat. You especially don’t want to miss out on any employer matching contribution, which is a part of your compensation that your employer will get to keep if you don’t make the appropriate contribution.
Then consider any contributions you can make to IRAs for both you and your spouse. These accounts are very valuable for tax deferred or tax-free growth. The Roth IRA is the best option to use for this. If you have a low income, like I did my retirement year, you can contribute directly to a Roth account. If your income is too high, you will need to do the backdoor Roth contribution.
2024 contribution limits are $7,000 for each spouse. You can put in an extra $1,000 catch up amount if you are 50 years old or older.
3: Maximize your Health Savings Account (HSA) contribution
The HSA is a fabulous stealth retirement account. Max it out every year, then don’t spend any of it until you retire. You can save up your healthcare receipts and turn them in later to get reimbursed tax free from your HSA, or you can just wait and use your account to pay for the healthcare costs you will have when you are older.
For 2024 the limit you can contribute to the account is $4,150 for singles and $8,300 for families. Those who are 55 years old or older can contribute an additional $1,000. Remember this is only available to those with a high deductible health insurance plan.
4: Make contributions to your children’s college fund in a 529 account
A 529 plan allow parents, grandparents, and others to save for their children/grandchildren’s college in an account that does not tax the interest as the account grows. Each person can put up to $18,000 a year into each child or grandchild’s account.
You may also take advantage of the five-year rule. This allows you to contribute five years’ worth of gifts in a lump sum and then average the payment for each of the next five years.
For example, you can make a $90,000 lump sum contribution and then no more for the next five years. The IRS will count it as if you made a $18,000 gift every year for the next five years. As the gift tax limitations continue to rise, you can add an additional amount above $18,000 each year to reach the maximum for that year.
5: Assess your giving
You want a great tax write-off, donate money to charity. Now is the time to assess how much money you have at the end of the year and how much you wish to give away. If you are close to the standard deduction, $27,700 for married couples, you could double up your donations and give them every other year and get better tax savings. You would take the standard deduction one year, then itemize the larger deduction the next year.
If you tithe, here is a good chance to see how close your tithe thus far (10% of your gross income + benefits) is to your actual Tithe need for the year. You can now adjust it to where it should be before the year is over.
You also can help your kids by passing on some of your estate early. Everyone may give up to $18,000 to any one individual, such as children or grandchildren, without filing additional tax forms. Each child could get $18,000 from you as well as $18,000 from your spouse. They likely can get a lot more use out of the money now, while they are young, than they will inheriting the money when you pass away, after they might already be retired.
6: Evaluate tax loss harvesting opportunities
If you had an investment that lost money, you can sell it for a loss, invest it in something similar, and take a tax write off for the loss. You can use it to offset anything you might have sold for a gain. You can also use up to $3,000 as a deduction against your earned income.
7: Assess your CME account
Most physicians have an allotted amount of money to use for continuing medical education (CME). If you don’t use it by the end of the year, it is lost, and your CME account will reset for next year. If you still have unspent money, try to spend it before the year ends by prepaying for an upcoming conference, for example.
8: Make Roth conversions
Now that you have an idea of what you earned this year and what your tax bracket will be, you can make decisions about Roth conversions. This is converting money you have in a traditional IRA account by moving it into a Roth IRA account. This move will generate taxable income for the current tax year. You can move enough money to increase your taxable income to the top of the tax bracket you are currently in.
Once you move the money into the Roth account, neither the principal nor the interest will ever be taxed again. It also will not have any required minimum distributions when you get older.
9: Be sure to take any required minimum distributions (RMD)
If you took an RMD last year, be sure to take it again this year. You will pay a penalty if you forget. If you turned 73 during 2024, it’s time to begin taking your RMD every year for the rest of your life. Talk with your CPA to determine how much you need to take from your retirement accounts each year. The RMD will create taxable income.
10: Rebalance your portfolio
If you do portfolio rebalancing, now is the time to assess where you stand. If it was a great year for one of your asset classes, you may need to sell some of your winners and reinvest the money into an asset class that has fallen behind. This should not be done more often than once a year.
11: Redo your budget for next year
Take a look at how you did this year. Did you have to borrow money which increased your debt? Did you end up with a large bank account? If either of these happened, you might think about a change in your budget for next year.
Look at any areas of your budget that are lacking or where you are grossly overspending. Then make the appropriate adjustments to next year’s budget.
Don’t forget that you likely maxed out your social security payments during the year and will have social security taken out of your paycheck again in January. I often get a call from people in my financial makeover coaching program in January wondering why their paycheck is lower than what they got in December of the prior year. It is a big jump to go from not getting any social security deducted from your paycheck in December, back to getting the full deduction from your paycheck in January.
12: Submit your BOIR before you get a $500 per day fine in January
If you own a business or an LLC you must submit a Beneficial Ownership Information Report (BOIR) before the end of the year. This is a one-time report that is new for 2024. Once submitted, you only modify it if the information changes. Click on the link above to see my article on how and why you need to submit this report.
13: Prepay next year’s expenses
A great way to reduce taxes this year is to pay a bill in December that you will collect services for next year. A great example is if you plan to hire me as a high-performance coach, pay the bill in December and get the coaching Jan-March. You get the deduction a year sooner. If you own a business, buy stuff in December such as a new ultrasound machine for the office, a leaf blower for a rental property, or tickets to an April conference.
There you have it, thirteen things to consider doing in December to make sure you end the year as clean as possible and start next year with a bang. I hope next year is even better than this one was for you.
