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Smart Tax Strategies to Consider During the Holiday Season

The holiday season is a time for giving, celebrating, and reflecting on the year. While taxes might not be top-of-mind amid festivities, it’s a great time to explore strategies that can reduce your tax bill before the year closes. Here are some timely tips to help you maximize deductions, credits, and overall tax savings before the calendar flips.

Charitable Giving

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The holidays inspire generosity, and giving to qualified charities can reduce your taxable income. Consider these tips:

Monetary Donations: Cash donations to qualified charities are deductible up to 60% of your adjusted gross income (AGI). Ensure you keep receipts or confirmation letters from the organization.

Non-Cash Contributions: Donate gently used clothes, furniture, or household items. Make sure these items are in good condition and document their fair market value.

Qualified Charitable Distributions (QCDs): If you’re over 70½, consider making a QCD from your IRA. This counts toward your required minimum distribution (RMD) and is excluded from taxable income.

Maximize Retirement Contributions

401(k) Plans: Contribute the maximum amount to your employer-sponsored plan. For 2024, the limit is $22,500 (or $30,000 if you’re over 50).

IRAs: If you qualify, contribute to a traditional or Roth IRA before the April tax deadline. For 2024, the contribution limit is $6,500 (or $7,500 for those over 50).

Contributing now reduces taxable income and boosts retirement savings, a win-win strategy.

Tax-Loss Harvesting

If your investments haven’t performed as expected, consider selling underperforming assets to offset capital gains. This strategy allows you to:

Offset gains from winning investments.

Deduct up to $3,000 of net capital losses against ordinary income.

Carry forward unused losses to future tax years.

Be mindful of the “wash-sale rule,” which disallows a tax deduction if you repurchase the same or a substantially identical investment within 30 days.

Review Flexible Spending Accounts (FSAs)

If you have a healthcare or dependent care FSA, check if you have unspent funds. Many FSAs have a “use-it-or-lose-it” policy, though some plans allow limited carryovers or a grace period. Use these funds for qualified expenses like medical bills, prescriptions, or childcare costs before they expire.

Defer Income and Accelerate Deductions

If you expect to be in a lower tax bracket next year, defer income and accelerate deductions where possible:

Delay year-end bonuses or business income to January.

Prepay deductible expenses such as mortgage interest or property taxes.

This strategy is particularly useful for small business owners and independent contractors.

Make the Most of Holiday Gifts

Giving gifts to employees, family, or clients? Follow these tax rules:

Employees: Small gifts (under $75) are deductible as a business expense.

Family and Friends: The annual gift exclusion is $17,000 per recipient in 2024 without triggering gift tax reporting.

Take Advantage of Energy-Efficient Tax Credits

If you’ve upgraded your home with energy-efficient improvements, you may qualify for federal tax credits. Examples include:

Installing solar panels, energy-efficient windows, or insulation.

Purchasing electric vehicles (EVs) or EV chargers.

The Inflation Reduction Act expanded these credits, so it’s worth reviewing eligible expenses for 2024.

Meet with a Tax Professional

The tax code changes often, and year-end planning can be complex. A tax professional can help you:

Optimize your deductions and credits.

Avoid surprises at tax time.

Strategize for next year based on your unique financial situation.

Final Thoughts

Proactive tax planning during the holidays can save you Money and set you up for a financially healthy new year. By acting before December 31, you’ll not only reduce your tax liability but also enjoy the season with less financial Stress.

The Right Side of 40 is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Originally Published on https://deborahheiserphd.substack.com/

Deborah Heiser, PhD The Right Side of 40

Deborah Heiser, PhD is an Applied Developmental Psychologist with a specialty in Aging. I'm a researcher, TEDx speaker, contributor for Psychology Today, Substack blogger, CEO of The Mentor Project, and adjunct professor of Psychology.

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