As the year comes to a close, it’s the perfect time to review your finances and take advantage of opportunities to minimize your tax burden. A few strategic moves before December 31 can make a real difference when it comes time to file your return.
Here are several ways to help you make the most of available tax benefits and position yourself for financial success in the new year.
1. Contribute to Retirement Accounts
Saving for retirement isn’t just about building long-term security, it can also offer valuable tax advantages.
- 401(k): For 2025, you can contribute up to $23,000, plus an additional $7,500 if you’re age 50 or older. Contributions reduce your taxable income today, and your savings grow tax-deferred.
- Traditional or Roth IRA: You can contribute up to $7,000, with an extra $1,000 if you’re 50 or older. Traditional IRA contributions may be deductible depending on your income, while Roth IRAs provide the benefit of tax-free withdrawals in retirement.
If you’re unsure which type of account is best for your situation, a financial professional can help you evaluate your options.
2. Harvest Tax Losses
If some of your investments haven’t performed as expected this year, you may be able to offset capital gains by selling underperforming assets. This is a strategy known as tax-loss harvesting. Any realized losses can offset gains, and if your losses exceed gains, you can use up to $3,000 to reduce ordinary income. Just be mindful of the IRS “wash-sale” rule, which prevents claiming a loss if you repurchase a substantially identical security within 30 days.
3. Give Strategically to Charity
Charitable giving is not only a meaningful way to give back but can also offer tax advantages. Consider:
- Cash donations to qualified charities (remember to keep receipts).
- Donating appreciated stock, which allows you to avoid capital gains while claiming the fair market value as a deduction.
- Qualified Charitable Distributions (QCDs): If you’re age 70½ or older, you can make direct transfers from your IRA to a qualified charity. These count toward your required minimum distribution (RMD) and can reduce taxable income.
4. Review Your Health and Flexible Spending Accounts
Don’t let unused healthcare funds go to waste.
- Flexible Spending Accounts (FSAs): These often have a “use it or lose it” rule. Check whether your plan allows a short grace period or carryover.
- Health Savings Accounts (HSAs): If you’re eligible, you can contribute pre-tax dollars and enjoy tax-free withdrawals for qualified medical expenses. HSAs can also serve as a long-term savings vehicle, since unused funds roll over year to year.
5. Double-Check Your Tax Withholding
Before the year ends, review your paycheck or estimated tax payments to ensure your withholding aligns with your actual liability. Adjusting now can help you avoid an unexpected bill, or a large refund, when you file your taxes in April.
Final Thoughts
Taking a few proactive steps before December 31 can help you improve your tax efficiency and set a stronger foundation for the year ahead. Everyone’s situation is unique, so it’s wise to review your strategy with a financial professional or tax advisor to ensure you’re making the most of the opportunities available to you.
