7 essential tax planning tips

Tax planning isn’t a once-a-year activity. Whether you’re aiming to maximize deductions, defer income or make smart investment decisions, proactive planning throughout the year can help you minimize your tax liability and keep more of your hard-earned money.

Here are seven tax planning tips that may help you optimize your tax situation, and when to consider taking action on them. 

7 essential tax planning tips

1. Check your paycheck withholdings at the beginning of each year.

An incorrect W-4 can result in an unexpected refund at tax time – or an unexpected tax bill. 

Use the IRS Tax Withholding Estimator to find out if you’ve been withholding the right amount or to calculate your desired refund amount.

If you need to make adjustments, file a new Form W-4 at your workplace that includes the added (or subtracted) withholding amount provided by the Withholding Estimator.

This is a good time to confirm your state income tax withholding information (if applicable) as well.

2. Make contributions to investment and spending accounts throughout the year.

One of the easiest ways to reduce your income tax liability is to reduce your taxable income. You can defer your tax liability — or eliminate it entirely — when you make qualifying contributions to specific financial vehicles, such as:

• Retirement accounts. You can make tax-deductible contributions to a 401(k) plan, 403(b) plan or traditional IRA. Plus, the amount you can contribute each year increases if you’re 50 and older.
• 529 plans. A 529 plan allows you to make contributions while enjoying tax-free earnings and withdrawals for approved educational expenses.
• HSAs. Health savings accounts (HSAs) give you the triple tax benefit of tax-deductible contributions, tax-free earnings and tax-free withdrawals for qualified medical expenses.
• FSAs and DCFSAs. Flexible spending accounts (FSA) and Dependent Care FSAs (DCFSA) let you bypass taxes to save for healthcare costs and dependent care, respectively. Depending on the plan, you may need to use the funds in these accounts within the calendar year or shortly thereafter.

All 401(k) contributions must be made by December 31. You can make contributions to IRAs and HSAs up to the tax filing deadline each year.

3. Consider a Roth IRA conversion before December 31.

While eligibility to open and contribute to a Roth IRA is based on income level, you can convert some or all the assets in a traditional IRA or workplace savings plan (e.g., 401(k)) to a Roth IRA.

Roth IRAs can play a valuable role in your retirement portfolio; unlike traditional IRAs, Roth IRAs are not subject to income taxes at the time of withdrawal in retirement. This can give you more flexibility to manage your cash flow and future tax liability.

Converting qualified assets, such as 401(k) or traditional IRA assets, to Roth IRA assets is considered a taxable event during the conversion year. Any pre-tax contributions and all earnings converted to the Roth IRA are added to the taxpayer’s gross income and taxed as ordinary income.

Talk with your tax advisor or financial professional to determine if a Roth conversion is right for you. If you move forward with a conversion, try to manage the tax impact. One strategy is to convert amounts only to the level where you remain in your current tax bracket. You can use partial Roth IRA conversions over a period of years to manage the tax liability.

4. Take any RMDs from traditional retirement accounts by December 31.

All employer-sponsored retirement plans, traditional IRAs and SEP and SIMPLE IRAs mandate required minimum distributions (RMDs) by April 1 following the year you turn 73. Thereafter, annual withdrawals must happen by December 31 to avoid the penalty.

RMDs are considered taxable income; if you don’t need the cash flow and would prefer not to increase your taxable income, you may want to consider a Qualified Charitable Distribution (QCD) directly from your qualified account to a public charity. However, you won’t get the charitable contribution itemized deduction. QCDs are limited to $105,000 in 2024 (adjusted yearly for inflation).  Different from rules governing RMDs, you can make a QCD gift as early as age 70 ½ if you’re charitably inclined.

5. Minimize capital gains tax on investments anytime throughout the year.

A capital gain refers to selling something for more than you spent on it, such as stocks. The federal government charges you for this profit with a capital gains tax.

There are several techniques you can use to reduce your tax burden on your investments. Consider discussing these options with your tax and financial professionals to determine which may be appropriate for your situation:

• Spread a sale over two years. If it’s practical for you, sell only a portion of your appreciated assets one year and the remainder the following year.
• Transfer appreciated assets to a charity. You’ll avoid the capital gains tax entirely and, in most cases, be able to claim a deduction for the fair market value of those assets.
• Take advantage of tax loss harvesting. Defer taxes by using your market losses to offset some of the gains your assets see over the course of the year.
• Invest your gains in Opportunity Zone funds. By shifting your money to qualified funds for disadvantaged communities, you may be able to defer or even reduce the tax you owe.

6. Think about “bunching” certain itemized deductions into a single year.

Certain expenses, such as the following, can be classified as “itemized” deductions:

• Deductible taxes
• Qualified mortgage interest, including points for buyers
• Casualty, disaster, and theft losses
• Investment interest on net investment income
• Medical and dental expenses
• Charitable contributions (note that you only get a tax deduction for the year in which you make the gift)

In order to itemize, your expenses in each category must be higher than a certain percentage of your adjusted gross income (AGI). However, “bunching” itemized deductions into a single year may help you reach that minimum threshold.

For example, let’s say you’d like to itemize your medical expenses. The threshold for itemizing medical expenses is 7.5% of your AGI. If your medical expenses total 5% of your AGI, it wouldn’t be beneficial to itemize. But, if you were able to delay 2.5% of your expenses to the following year, you’d be more likely to reach the minimum 7.5% AGI that next tax season, allowing you to itemize.

Grouping itemized deductions such as medical and dental procedures or charitable contributions (or any of the qualified itemized deductions you have more control of) can help put you over the standard deduction threshold and get the most out of itemizing your taxes.

7. Make the most of your gifting by December 31.

The annual exclusion gifting amount in 2024 is $18,000 for individuals and $36,000 for married couples filing jointly, per person. You can give up to $18,000 (or $36,000 if married) to as many individuals as you like every year without using any lifetime exemption. Gifts in excess of the annual exclusion amount will reduce your available lifetime estate tax exemption. 

The lifetime estate tax exemption is the total amount you may gift during your lifetime (or may pass to non-spouse heirs at your death), free from federal estate taxes. The 2017 Tax Cuts and Jobs Act (TCJA) doubled the federal lifetime estate tax exemption, and with inflation, the exemption is now $13.61 million per individual and $27.22 million for married couples filing jointly in 2024. 

However, the increased federal estate tax exemption amount was not permanent, and following a 2025 sunset, federal estate tax exemption amounts will return to approximately half of their current levels (adjusted for inflation). 

If gifting is part of your wealth plan, be sure to discuss your options with your tax and financial professionals.  

Work closely with a financial professional

A financial professional can help you see how different aspects of your finances (e.g., taxes, investments, and charitable giving) work together to support you in reaching your goals. They can also partner with a tax professional to ensure you’re making informed decisions and help you align your tax strategy with your financial plan.

Share your vision and take full advantage of their expertise. With a little preparation, you can be more strategic about your taxes throughout the year.

Learn how our approach to wealth planning can help you see a full view of your financial picture.