Tax planning involves looking for opportunities to improve your tax situation BEFORE the end of the year. Don’t miss out this year! By anticipating your current and future tax brackets, the aim is to pay taxes when the rates are the lowest.
1. Income tax rates and deductions for 2025 are likely to be similar to 2024. So, if one year is likely to be a higher income year for you than the other, defer or accelerate income accordingly.
Example: If 2024 is a higher income year, consider bunching charitable deductions rather than equal amounts each year. Gift appreciated property you have owned for more than a year. Assets that have dropped in value should be sold first to take the loss, then the cash can be donated if you are able to itemize your deductions. You can also Turn Your RMDs Into Charitable Donations.
2. See if you qualify for the 0% rate on long-term gains. If your taxable income other than long-term gains doesn’t exceed $47,025 (single filers) or $94,050 (joint filers), then your qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal tax rate until they push you over the threshold amounts. These gains still impact your overall Adjusted Gross Income (AGI) and could be subject to state income taxes.
3. Maximize your 2024 401(k) and IRA contributions. The deadline for 401(k)s and other workplace plans is December 31st, but you have until April 15, 2025 to contribute to an IRA for 2024. You can contribute $23,000 to a 401(k) and $7,000 to an IRA. Turning 50 or older this year? If so, you can stash $30,500 in a 401(k) and $8,000 in an IRA.
4. Go green if pondering home updates. The residential clean-energy property credit is equal to 30% of the cost of solar panels, geothermal heat pumps, and more. There is also a smaller energy-efficient home improvement credit up to $1,200 for certain improvements like windows that meet certain energy-efficient standards. If you are considering multiple upgrades, consider staggering them over 2024 and 2025 to maximize the tax breaks.
5. Consider converting IRA Assets to a Roth IRA if you are in a lower tax bracket this year. You will need to pay the taxes on converting right away, but then the converted amount AND all of the future growth will become tax-free.
At Whitford Financial Planning, tax planning is a year-round event and all we need to get started is a PDF of your most recent tax return!
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