9 Powerful Tax Planning Strategies to Implement Before the Year Ends

Lately, the stakes surrounding year-end tax planning have never been higher. With high inflation eating away at disposable income and tax rates poised to rise, proactively reducing your taxable income through smart planning is crucial.

At Hammond Law Group, we understand that the Internal Revenue Service (IRS) and Colorado Department of Revenue rules can seem like an inescapable labyrinth. However, you could save thousands on your tax bill with strategic planning.

Whether you’re an individual or a small business owner, the strategies outlined here call for optimizing your finances and keeping more of your hard-earned money. We’ve walked this journey countless times alongside clients who seek tax efficiency.

1. Max Out Retirement Account Contributions

One of the most reliable paths to minimizing taxes is by contributing to tax-advantaged retirement accounts like 401(k)s and individual retirement accounts, or IRAs. Maximizing these accounts lets you keep more upfront while saving for the future.

• For traditional 401(k) plans, you can contribute up to $23,000 in 2024 on a pre-tax basis.
• If you’re self-employed or don’t have a workplace plan, a traditional IRA allows up to $7,000 in deductible contributions or $8,000 for those aged 50+.

Roth options like Roth IRAs are also powerful tax tools. You contribute after-tax dollars, but qualified withdrawals made during retirement are 100% tax-free. For younger adults, banking on tax-free income decades from now may be a wise move.

2. Capital Losses

Speaking of wise moves, have you evaluated your taxable investment portfolio lately? The concept of a capital loss allows you to strategically offload certain assets to offset capital gains. Further, you can use up to $3,000 of capital losses to reduce ordinary income, like wages.

For example, you might sell the Tesla loser if you have a $10,000 gain on Apple stock but an $8,000 unrealized loss in Tesla. You might eliminate the $10,000 gain while carrying forward the extra $2,000 loss. Tax rates on long-term gains can reach 23.8% for top earners, so harvesting losses often proves valuable.

There are strategies and limitations around this strategy, but recognizing opportunities to rebalance, upgrade your portfolio, and reduce taxes is invaluable.

3. Charitable Donations

Does supporting your favorite causes tug at your heartstrings? Well, it can also lessen tax burdens. Donating cash or appreciated assets to IRS-qualified charities is deductible on itemized tax returns.

Better yet, consider “bunching” donations into a donor-advised fund and then distributing assets to charities over time. This allows you to combine multiple years’ worth of donations, and your contributions are deducted upfront while you maintain future advisory privileges over distributions. It’s a win-win strategy where tax savings meet philanthropic goals.

Colorado has no shortage of deserving organizations working tirelessly to uplift our communities. Why not direct your giving their way while enjoying the uplifting experience of reducing taxes?

4. Health Savings Accounts (HSAs)

Our next stop covers triple-tax-advantaged health savings accounts (HSAs). If you have a qualified high-deductible health plan, HSAs permit tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. This trifecta of tax benefits is unmatched by similar accounts.

For 2024:

• Individuals can contribute up to $4,150 to an HSA
• Families can contribute up to $8,300 to an HSA
• Those aged 55 and older are allowed a $1,000 catch-up

HSA funds roll over yearly, and any interest or investment growth is tax-free. It’s a sure way to build a healthcare nest egg while scoring an upfront tax deduction. With projections pointing to continued healthcare inflation, this powerful account demands consideration on your tax journey.

5. Take Advantage of Section 179 Deduction

Small business owners and self-employed professionals who purchase equipment or assets for their business may qualify for the extremely beneficial Section 179 deduction.

Under Section 179, businesses can deduct the full purchase price of qualifying assets like equipment, software, vehicles, and more rather than depreciating them over several years. For 2024, businesses can expense a maximum of $1,220,000 in qualifying property.

Additionally, the asset only needs to be placed into service by December 31 – no need to have purchased it earlier in the year. So, if you’ve been eyeing a major equipment upgrade or expansion, now might be the prime time to pull the trigger and save on taxes.

6. Establish a Retirement Plan for Your Business

While we’re on the subject of self-employment/small business strategies, creating a retirement plan should be at the forefront of our minds. Not only can it reduce taxable business income, but it can also turbocharge your personal retirement savings efforts.

Some popular options include:

• Solo 401(k): Allow up to $69,000 in tax-deductible contributions for solo business owners (owners who are also the sole employee), plus $7,500 for those age 50+
• SEP IRA: The lesser of 25% of employee compensation or up to $69,000 can be contributed on a tax-deferred basis
• SIMPLE IRA: Allows employee salary deferrals up to $16,000 in 2024 ($19,500 if 50+)

These plans provide tax benefits on both the business and personal side – reducing your tax bill today while saving for tomorrow. It’s a highly strategic move for entrepreneurs and self-employed professionals.

7. Optimize Business Structure

The right entity type (LLC, S-Corp, C-Corp, partnership) is vital for tax optimization. Reevaluating your business structure can open up new planning opportunities.

For example, owners of small personal service corporations may save on self-employment taxes by switching to an S-Corporation structure and drawing a reasonable salary while taking additional profits as distributions. LLCs can be treated as pass-through entities to avoid the corporate double-taxation haircut.

On the flip side, some corporations may benefit from lower corporate tax rates than pass-through businesses like LLCs. There are countless moving parts to analyze holistically, but evaluating entity structure is worthwhile for any established business.

8. Claim the Home Office Deduction

Don’t overlook the home office deduction for those running businesses out of their homes. If you use a dedicated portion of your residence “regularly and exclusively” for business, you can deduct a percentage of mortgage interest, utilities, insurance, and more.

There’s a simplified method that just calculates $5 per square foot up to 300 square feet. However, the standard method of capturing actual expenses may yield a higher deduction for some dedicated spaces exceeding 300 square feet. Either way, it’s a dollar-for-dollar reduction of self-employment income just for working where you live.

One word of caution: The IRS scrutinizes home office deductions closely. Consider taking photos of your dedicated workspace and saving those utility bills to justify any claimed deductions.

9. Talk to Your Estate Planning Attorney About Planning for the New Estate Tax Exemption

On January 1, 2026, the current estate tax exemption will sunset and drop back to the prior Tax Cuts and Jobs Act amount of $5 million, adjusted for inflation. This change will subject many more people to the estate tax when they die, which typically runs at a rate of approximately 40%.

In order to avoid paying unnecessary estate taxes, you need to have a plan. If you’re married, planning ahead ensures that you can leave double the exemption amount tax-free to the next generation. If you’re single, there are a variety of ways to minimize taxes.

Schedule a meeting with your estate planning attorney now to review your options and ensure your money goes to your loved ones instead of unnecessarily to the government.

Unlock Your Tax-Saving Potential with Hammond Law Group

Whether you’re an employee, business owner, or self-employed professional, these represent just a handful of the opportunities available through proactive tax planning. At Hammond Law Group, we work with your team of advisors to equip you with every permissible tool and technique to ease your tax burden and maximize your financial growth.

Our attorneys are dedicated to helping you navigate estate tax laws, identify potential tax-saving opportunities, and implement effective strategies tailored to your unique circumstances.