Three Must-Do Tax Moves Before the Year Ends

As the year winds down, small business owners and individuals alike are gearing up to close their books and optimize their tax situation. The moves you make before December 31 can significantly impact your tax liability and your financial health. To ensure you’re maximizing deductions, taking advantage of available credits, and setting yourself up for success in the new year, here are three critical tax moves to make before the year ends.

1. Maximize Retirement Contributions

One of the best ways to reduce your taxable income is by contributing to tax-advantaged retirement accounts. Depending on your employment status or business structure, here’s what you can do:

For Individuals:

• 401(k): If you’re an employee, you can contribute up to $22,500 in 2024 (or $30,000 if you're 50 or older). Contributions must be made by December 31, 2024, to count for the tax year.
• IRA: Contributions to traditional IRAs can reduce taxable income, but unlike 401(k)s, you typically have until the tax filing deadline in April to contribute. However, contributing early can help grow your investments sooner.

For Business Owners:

• SEP IRA or Solo 401(k): If you're self-employed, these plans allow high contribution limits and substantial tax savings. For a Solo 401(k), elective deferrals must be made by December 31. Employer contributions, however, may be made up until your business tax filing deadline.

Why It Matters:

Not only do these contributions lower your taxable income, but they also help secure your financial future. The earlier you act, the more time your investments have to grow tax-deferred.

2. Accelerate Deductions and Defer Income

Taking control of your cash flow and timing can make a big difference when it comes to taxes. Here’s how to approach it:

Accelerate Deductions

If you’re a business owner, consider making necessary purchases or paying for expenses now to claim the deduction in this tax year. Examples include:

• Buying office supplies, equipment, or machinery.
• Prepaying for services like rent, subscriptions, or insurance premiums.
• Donating to qualified charities, as charitable contributions are tax-deductible (ensure the charity is IRS-approved).

Defer Income

If you expect to be in a lower tax bracket next year, consider deferring income until January. For example:

• Delay sending invoices until late December so payments are received in 2025.
• Push year-end bonuses into the next tax year.

Why It Matters:

Accelerating deductions can reduce this year’s taxable income, while deferring income pushes it to the next year, potentially lowering your overall tax burden depending on expected tax rates.

3. Harvest Tax Losses in Your Investment Portfolio

If you’ve experienced losses in your investment portfolio this year, you can use a strategy called tax-loss harvesting to offset gains and reduce your taxable income.

How It Works:

• Sell Underperforming Investments: Selling investments that have declined in value allows you to realize a loss for tax purposes.
• Offset Gains: These losses can offset capital gains from other investments. If your losses exceed your gains, you can deduct up to $3,000 ($1,500 if married filing separately) from your ordinary income.
• Reinvest Smartly: Avoid the "wash-sale rule," which disallows claiming a loss if you repurchase the same or substantially identical investment within 30 days.

Why It Matters:

Tax-loss harvesting can effectively reduce your capital gains tax liability or even offset ordinary income. This strategy is especially useful in volatile markets where you may have both winners and losers in your portfolio.

Bonus Tips

While these three moves are essential, here are a few other considerations before the year ends:

• Review Tax Withholding: If you’ve had significant income changes this year, ensure your tax withholding or estimated payments are on track to avoid penalties.
• Claim All Available Credits: Look into credits like the Work Opportunity Tax Credit (WOTC), Child Tax Credit, or Energy Efficiency Credits if they apply to you.
• Organize Financial Records: Gather all receipts, invoices, and statements now to simplify tax filing in the new year.

Take Action Now

The year-end deadline is non-negotiable, so taking action now is critical. By maximizing your retirement contributions, strategically managing income and expenses, and harvesting tax losses, you can minimize your tax liability and position yourself for a strong start to the new year. Working with a tax professional or financial advisor can ensure you’re making the right moves and staying compliant with tax regulations. Don’t leave these valuable opportunities on the table—act now and make the most of the remaining time this year!