Don't Mess With Taxes

I love Santa Claus, but even the Jolly Old Elf isn’t magical enough to provide the tax solutions you asked for in your letter to him. You’re going to have to make some tax moves, like the 10 below, yourself. (Photo by Kaboompics.com)

Ho, Ho, Holy Moly! December sure got here quickly!

Thanks to the 2024 calendar, we (or at least I) haven't even had time to sufficiently recover from Thanksgiving. But time, and taxes, march on, meaning we’ll just have to deal with a compressed holiday schedule as best we can.

I hate to be the Tax Grinch adding to your already very long list of seasonal tasks, but some moves you make this final month of the tax year could help reduce the amount you’ll owe Uncle Sam next filing season.

Or help your children continue college. Or make your retirement years more comfortable.

If any of those sound like a perfect personal tax present, then since time is short, let's get to 10 tax moves to consider this December.

1. Contribute to tax-advantaged accounts. You have until the tax filing deadline of April 15, 2025, to contribute to your IRA, either traditional or Roth, but if you also have a workplace retirement plan, typically a 401(k) or 403(b), the deadline to add money is Dec. 31 of the tax year.

For 2024, you can contribute up to $23,000 to your workplace plan. For on-top-of-it tax planners, that amount goes to $23,500 in 2025. If you're 50 or over, you can make additional catch-up contributions of $7,500.

And if you do want to get your IRA earning earlier rather than delaying it until next April, you can contribute up to $7,000 in either a Roth or traditional IRA for the 2024 tax year. There’s a catchup option for IRAs, too, but it’s $1,000 for retirement savers age 50 or older.

2. Turn investment losses into tax gains. The markets have been on a tear of late, but it’s still possible you lost some money on some of your nonretirement holdings this year. That’s not good for your personal balance sheet, but at least the amounts could provide a tax benefit via tax-loss harvesting.

Here, you can sell those losing assets by year’s end and use those amounts to offset any capital gains you realized. If you happen to have more losses than gains, you can use up to $3,000 in losses to offset your ordinary income. If you have more than three grand in losses, consider changing investment advisers. Also note that you can carry forward the excess capital loss to use in future tax years.

3. Evaluate educational tax benefits. With the next semester of college coming up, consider prepaying that first quarter tuition bill now. Then you can use that amount to claim the American Opportunity Tax Credit.

This credit, which like all tax credits is a dollar-for-dollar reduction of any tax due, is for students in their first four years of undergraduate study. It's worth up to $2,500 for each qualifying student, and is available for prepaid tuition as long as the classes begin next year by the end of March

There are income limits on the American Opportunity credit claim, but even if you make what the tax code considers too much, you might be eligible for a partial tax credit.

Don't forget about your own continuing education. If you're planning to take a class next year to help you do your job better, prepay that amount, too. Then use that amount to claim the Lifetime Learning Credit on your 2024 tax return. As "lifetime" in the credit's name indicates, this tax break isn't limited to undergraduate expenses, and you don't have to be a full-time student.

The Lifetime Learning Credit is worth up to 20 percent of your out-of-pocket costs for tuition, fees, and books, up to a maximum of $2,000. Again, there are income limits, but also partial credit claim options.

And, of course, don’t forget about your child’s 529 plan. These state-administered special college savings accounts, named after the section of the Internal Revenue Code that authorized them, don’t have an official, fixed maximum contribution limit. Each state sets 529 plan limits based on educational costs at colleges within its borders.

But there is a way to super fund a 529. The federal tax code allows individuals to gift a certain amount each year without triggering federal gift tax issues. In 2024, that federal gift tax exclusion amount is $18,000 per person. If you have loads of cash and want to help a child pay for an expensive school, you can contribute up to five times the year’s exclusion at one time and not worry about federal gift tax implications as long as you file Form 709 with your federal tax returns for the year the contribution was made and make no other taxable gifts to the 529 account beneficiary during the year of the major 529 gift or the next four calendar years.

4. Don't forget about your IRA RMD. If you're 73 or older and have a traditional IRA , you have until Dec. 31 to take your required minimum distribution (RMD). Some other tax-deferred retirement plans also must meet RMD rules. If you don’t take out at least the amount demanded by the Internal Revenue Service’s applicable life expectancy table, you could face a 25 percent penalty.

If you just turned 73 this year, you can wait until next April 1 to take your first RMD. But don’t jump at the chance to day the distribution. If you do, you’ll face two RMDs the next year. The double RMD amounts could increase your taxable income, including the amount you owe on Social Security benefits, as well as bump up the premiums you pay for Part B Medicare benefits.

One way to keep the RMD money out of the tax collector’s hands is to give it to your favorite charity as a qualified charitable distribution (QCD). You can read more about this option in Tax Turkey to Avoid #4: Overlooking alternative ways to give to charity. The timing of this direct charitable gift is the same as your RMD; the donation must be made by Dec. 31.

5. Consider a Roth conversion. If you don’t want to mess with RMDs, consider converting your traditional IRA to a Roth IRA. You'll pay taxes on the converted amount, but once it’s in the Roth, it will continue to grow and you can take the money out when you want, not when Uncle Sam says you must.

If you don’t want a major Roth conversion tax bill, you can make the change incrementally. Tax Turkey to Avoid #5: Not exploring a Roth IRA conversion has more on the various factors to consider when making this retirement plan change.

6. Explore clean energy tax credits. This could be the last year for some energy tax breaks created and/or enhanced under the Biden Administration’s Inflation Reduction Act. Donald J. Trump wants to dismantle much of that law’s energy provisions when he returns to the Oval Office next year. So if you’ve been thinking of taking advantage of these environmentally-friendly energy tax breaks, think fast.

The clean energy credits include residential energy property credits, as well as vehicle-related credits.

The energy efficient home improvement credit is a credit for 30 percent of the costs of all qualified energy efficiency improvements and residential energy property expenditures made during the year, subject to an annual limit of $1,200. There are also annual limits, some higher than the $1,200 amount, for specific types of qualifying improvements.

Other more extensive residential energy upgrades also are covered via larger credits. They include solar electricity, solar water heating, fuel cells, small wind energy, geothermal heat pumps, and battery storage technology.

The key to claiming any of these is to get the work done by Dec. 31. So do what you can in the next four weeks to get whatever energy tax credits you can.

7. Defer business income until January. If you have your own business, either as your fulltime employment or from freelance gig work, defer some income you might be due this month. This move, of course, depends on just how much you need the money to cover your business and personal expenses.

But if you can afford to forego at least some of it for a few weeks, for example, by not sending out December invoices until Jan. 1, you’ll reduce this year’s taxable income. Any business income you defer until the new year won’t be taxable until 2026. Yes, you’ll owe taxes on it for that year, but you’ll have time to work out how best to do that.

8. Review your estimated tax payments. If you are paying your estimated tax amounts in four equal payments that total at least 100 percent of your last filing’s tax liability (110 percent for higher income earners), you’re OK. You’re meeting the IRS’ safe harbor to avoid a penalty for underpaying your estimated taxes.

But if you just started making 1040-ES payments during the year, or are sort of winging it (not judging, but suggesting you stop doing this), you need to look at what you estimate this year’s tax bill eventually will be.

If your total tax due when you file is $1,000 or more in tax, the interest charge will apply to the amount that's not been paid for the due period. It's also compounded daily, meaning amounts can add up quickly.

If you also have wage income, you can help cover the estimated tax shortfall by upping your withholding amount for the rest of the year to meet or at least get close to your eventual due tax amount. This tactic also works if your spouse has a salaried job and ups withholding on those earnings that you both report on your jointly filed tax return.

An unexpectedly large investment distribution could pose tax payment issues, too. Even if you’re going to be fine due to the safe harbor payments, you’ll have to come up with the taxes when you file next year. It’s better to know that now, and start thinking about how you’ll pay, than to be surprised when you finally fill our your 1040.

9. Review and adjust your withholding. Long-time readers of the ol’ blog were probably wondering if I’d forgotten this one. Nope. That withholding adjustment mention in move #8 was just an appetizer. And I just wanted to keep you on your tax toes!

Even if you don’t need to tweak your withholding to help cover additional taxes from side hustle income as noted in #8, it’s a good idea to look at your withholding.

Since there aren’t that many pay periods left in the year, you might want to consider the option to have a specific amount withheld from your remaining paychecks. That’s done on line 4(c), “Extra withholding. Enter any additional tax you want withheld each pay period,” of Form W-4.

10. Know how life events could affect your taxes. Life is change, and many of those changes affect your taxes.

If you got married in 2024, even if you exchanged your vows on Dec. 31, the tax code considers you married for the full tax year. That means you and your spouse now can file jointly or as married filing separately. As a many-decade-married person, the married filing jointly option is usually the best tax move.

And if a child comes along by Dec. 31, that new family member will definitely change your life and taxes, starting with the tax year in which the bundle of joy was born.

The Dec. 31 date also applies to divorce. If your official, formal split is finalized by the end of the tax year, then when filing season rolls around, you’ll be looking at another filing status. That would be either single filer or, if you’re the one with primary custody of your marriage’s children, head of household.

If the filing status change dramatically helps or hurts either soon-to-be-ex-spouse, it could be worth discussing the possibility of delaying the formal divorce decree, or reevaluating settlement arrangements.

Where a marriage ends due to the death of a spouse, surviving spouses can still file as married filing jointly for the year they lost their husband or wife. The following year, the surviving spouse may be eligible to file as head-of-household if dependent children are still relying on the taxpayer for shelter and support.

More December tax moves: I know, these 10 tax moves, which also are this weekend’s By the Numbers figure, look daunting since your December to-do list already is full of holiday tasks.

But at least look into those that apply to you. They could be worthwhile tax savings, now or in the future.

For those of you who are more organized and ready to add taxes to your seasonal activities, you can find a few more December tax moves in their usual place, over in the right hand column of the ol' blog.

OK, you’ll soon find them over there. I’m still dealing with a bit of a Thanksgiving hangover. When they are posted, I’ll note it here and on social media. Then give them a look.

UPDATE, Wednesday, Dec. 4, 2024: The additional December Tax Moves are finally posted! I hope the rest of this month isn't as crazy, and crowded with tasks (tax and otherwise!) as these first few days have been. Who am I kidding? December is going to stay hectic, and that's part of the reason we love this month and its all-consuming holidays! 

If you take relevant tax steps early this month, you'll free up time for more traditional, and fun, festivities.

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