Tax Planning Strategies Before Year End

September 12, 2024  | By David Lowe

It’s almost the last quarter of 2024. Can you believe it?

Now is an ideal time to review your tax planning with your financial advisor and tax preparer or CPA so you can implement appropriate strategies for 2024.

If you are a W-2 employee or are retired, you may have more limited tax planning options than business owners do. Nevertheless, here are several topics to consider to help mitigate your tax bill:

• Review income tax withholdings and/or estimated quarterly payments. Adjust if needed if income has been higher than originally projected.

• Review pre-tax contributions to qualified retirements, such as a 401(k), 403(b), etc. If your cash flow allows, increase contributions to reduce your taxable income.

• Review stock options and/or equity compensation (i.e. ISOs, NQSOs, RSUs), and develop strategies to liquidate in a tax-efficient manner.

• Review whether you are a good candidate for a Roth conversion. In certain situations, a Roth conversion can reduce total lifetime taxes. A Roth conversion can be beneficial if you are retired and have not started receiving Social Security benefits yet – or if you still are working but have had a much lower income year than usual.

• If you are charitably inclined, consider bunching your giving into the current year (rather than spreading it out over a longer time period) to maximize tax deductions. For those age 70.5 or older, consider Qualified Charitable Distributions from an IRA.

Business owners can consider these additional opportunities:

• Make SEP IRA contributions or 401(k) profit sharing contributions. Because of extensions, you still have time to do this for the 2023 tax year. If you filed a tax extension, your SEP / profit sharing contribution deadline is the extended tax filing deadline (September 16, 2024 for S corporations and partnerships; October 15, 2024 for sole proprietorships and C corps).

• S corp filing. As net income exceeds $100k, S corp filing can yield tax savings. It likely is too late to make a difference for this year, but now is a good time to start analyzing the pros and cons of S corp status for 2025. With an S corp, you can limit your salary to what the IRS considers “reasonable” and take the rest of your pay as distributions. If done correctly, this can decrease total taxes by reducing FICA. The calculations are complicated, so please consult with your CPA and financial advisor.

• Develop strategies to maximize Section 199A Qualified Business Income deductions. This can include calculating the optimal mix of W-2 wages versus distributions.

• If you need to buy big-ticket items (software, equipment, vehicles, etc.), consider purchasing them by the end of your company’s tax year instead of delaying the expense. That way, the expense can reduce the current year’s taxable income.

• If you have a dedicated work space at home, make sure you qualify for and claim the home office deduction.

• Use deductible business expenses to your advantage. As long as there is a legitimate business purpose, this can include phone bills, data plans, travel, meals and entertainment.

• Put your kids on payroll if they perform bona fide services for the business. This takes advantage of the kids’ standard deduction (the first $14,600 of income is tax-free), teaches your kids the value of hard work, and lets you fund custodial Roth IRAs while your kids are young. The longer a Roth IRA has to compound its growth, the larger the tax-free income bucket you create for your kids’ future.