Year-end tax planning: strategies to maximize deductions before December 31

As the calendar year draws to a close, you have a limited window to take actions that can reduce your tax bill for the current year. Unlike many aspects of taxes that are determined by circumstances beyond your control, year-end planning puts real choices in your hands. The strategies in this guide can help you keep more of your hard-earned money while staying fully compliant with tax laws. The key is acting before December 31, when many opportunities expire until next year.

Start with a year-end tax projection

Before diving into specific strategies, take time to estimate your total income and tax liability for the year. This projection helps you understand where you stand and which strategies will have the most impact. You'll want to consider your expected adjusted gross income, whether you'll itemize or take the standard deduction, your likely marginal tax bracket, and any credits you expect to claim.

If you've had a year with unusual income—a large bonus, sale of property, stock option exercise, or inheritance—year-end planning becomes even more important. Conversely, if your income is lower than typical, there may be opportunities to accelerate income or convert retirement accounts to fill up lower tax brackets.

A quick estimate now can guide your decisions over the remaining weeks of the year and help you prioritize which strategies deserve your attention.

Maximize retirement account contributions

Contributing to tax-advantaged retirement accounts is one of the most effective ways to reduce your current tax bill while building long-term wealth. For 401(k) plans, the employee contribution limit for 2024 is $23,000, with an additional $7,500 catch-up contribution allowed if you're 50 or older. These contributions reduce your taxable income dollar-for-dollar if you're using a traditional (pre-tax) 401(k).

If you haven't been maximizing contributions throughout the year, see if your employer allows you to increase your contribution percentage for remaining paychecks. Some plans allow changes at any time, while others have specific enrollment periods. Even increasing your contribution for the final few pay periods can meaningfully reduce your taxable income.

For traditional and Roth IRAs, the 2024 contribution limit is $7,000 (plus $1,000 catch-up if 50 or older). While IRA contributions can technically be made until the tax filing deadline (typically mid-April of the following year), planning now ensures you have funds available and understand which type of IRA—traditional or Roth—makes sense given your current income and tax bracket.

Consider a Roth conversion

If you have traditional IRA or 401(k) funds and expect to be in a higher tax bracket in the future (or believe tax rates will increase), a Roth conversion might make sense. Converting traditional retirement funds to a Roth account requires paying tax on the converted amount now, but all future growth and qualified withdrawals become tax-free.

Roth conversions are particularly strategic in years when your income is lower than usual—perhaps due to a job transition, sabbatical, or early retirement before Social Security and required minimum distributions begin. The goal is to "fill up" lower tax brackets with converted amounts, paying tax at today's lower rates rather than potentially higher rates later.

Roth conversions must be completed by December 31 to count for the current tax year. Unlike contributions, there's no grace period extending into the following year. If you're considering a conversion, act early enough to ensure the transaction processes before year-end.

Strategic charitable giving

Charitable donations can provide meaningful tax benefits if you itemize deductions. Cash donations to qualified charities are generally deductible up to 60% of your adjusted gross income, while donations of appreciated assets have lower limits but offer additional benefits.

Donating appreciated securities

Instead of selling appreciated stocks or mutual funds and then donating cash, consider donating the securities directly. You'll receive a deduction for the full fair market value (for assets held more than one year) while avoiding capital gains tax on the appreciation. This effectively increases the value of your gift to charity while maximizing your tax benefit.

For example, if you have stock worth $10,000 that you purchased for $4,000, selling it would trigger $6,000 in capital gains (potentially $900-$1,200 in federal taxes at 15-20% rates). Donating it directly avoids that tax and still gives you a $10,000 deduction.

Bunching donations

With the standard deduction significantly increased in recent years, many taxpayers find they don't have enough itemized deductions to exceed the standard deduction threshold. "Bunching" is a strategy where you combine multiple years' worth of charitable giving into a single year, itemizing in that year while taking the standard deduction in other years.

For instance, if you typically give $8,000 per year to charity, you might instead give $24,000 every three years. In the "bunching" year, your higher charitable deduction might push you over the standard deduction threshold, allowing you to capture the tax benefit. In the other two years, you take the standard deduction.

Donor-advised funds

A donor-advised fund (DAF) allows you to make a tax-deductible contribution now while distributing the funds to charities over time. This is particularly useful for bunching—you can contribute a large amount to your DAF in one year (claiming the full deduction) and then recommend grants to your favorite charities over subsequent years.

DAFs also simplify record-keeping and allow your contributions to grow tax-free while awaiting distribution. Most major brokerage firms offer DAFs with low minimums and fees.

Harvest investment losses (and gains)

Tax-loss harvesting involves selling investments that have declined in value to realize losses that can offset capital gains and up to $3,000 of ordinary income per year. Excess losses carry forward to future years indefinitely.

Review your taxable investment accounts for positions with unrealized losses. If selling makes sense from an investment perspective (or if you can replace the position with a similar but not "substantially identical" investment to maintain your market exposure), harvesting the loss creates a tax asset.

Be aware of the "wash sale" rule: if you repurchase a substantially identical security within 30 days before or after the sale, the loss is disallowed. You can work around this by waiting 31 days to repurchase, buying a similar but not identical investment (like a different index fund tracking the same market), or purchasing in a different account type.

Conversely, if you're in a low-income year and have long-term capital gains that would qualify for the 0% rate, it might make sense to harvest gains—selling appreciated investments and immediately repurchasing them (wash sale rules don't apply to gains) to reset your cost basis higher. This strategy locks in today's 0% rate and reduces future taxable gains.

Business expense timing for self-employed individuals

If you're self-employed or own a small business, you have flexibility in timing business expenses. Accelerating deductible expenses into the current year reduces current-year taxes, while deferring income (where possible and appropriate) pushes tax liability into the following year.

Prepaying expenses

Consider prepaying certain deductible expenses before December 31:

• Office supplies and materials you'll use early next year
• Professional subscriptions and memberships with January renewals
• Business insurance premiums
• Equipment and software (may qualify for Section 179 expensing)
• Professional development and training

Be reasonable—the IRS limits prepaying to about 12 months in advance. But prepaying a January insurance premium or annual subscription in December is generally acceptable.

Equipment purchases and Section 179

The Section 179 deduction allows businesses to deduct the full purchase price of qualifying equipment and software in the year of purchase, rather than depreciating it over several years. For 2024, the deduction limit is $1,220,000. If you've been planning to purchase equipment, doing so before December 31 allows you to claim the deduction for this year.

Additionally, bonus depreciation allows 60% first-year depreciation on new and used qualified property in 2024. This can be combined with Section 179 for significant immediate deductions on business asset purchases.

Health savings account contributions

If you're enrolled in a high-deductible health plan (HDHP), you're eligible to contribute to a Health Savings Account (HSA). HSAs offer triple tax benefits: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.

For 2024, contribution limits are $4,150 for individual coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution for those 55 or older. Like IRAs, HSA contributions can be made until the tax filing deadline, but contributing before year-end ensures you don't forget and allows the money to start growing sooner.

If you're not currently maximizing your HSA, consider increasing contributions. HSAs are particularly powerful for retirement planning because after age 65, you can withdraw funds for any purpose (not just medical expenses) and pay only ordinary income tax—similar to a traditional IRA but with the additional benefit of tax-free medical withdrawals.

Flexible spending account deadlines

Unlike HSAs, flexible spending accounts (FSAs) have use-it-or-lose-it provisions. Some plans offer a grace period extending into the following year or allow a small carryover amount, but generally, you need to incur qualified expenses by December 31 (or shortly after, depending on your plan) or forfeit unused funds.

Review your FSA balance and plan rules. If you have remaining funds, consider scheduling medical appointments, purchasing new glasses or contacts, stocking up on eligible over-the-counter items, or addressing dental work before the deadline.

State and local tax considerations

The deduction for state and local taxes (SALT) is capped at $10,000 ($5,000 if married filing separately). If you're already at or above this cap, prepaying state income taxes or property taxes provides no additional federal benefit.

However, if you're below the $10,000 cap, prepaying your fourth quarter state estimated tax payment before December 31 (instead of January 15) allows you to deduct it on your current-year federal return if you itemize. Similarly, prepaying property taxes can pull the deduction into the current year.

Be cautious with state income tax prepayments if you're subject to the alternative minimum tax (AMT), as state tax deductions are disallowed under AMT calculations.

Required minimum distributions

If you're 73 or older (the age increased from 72 starting in 2023), you must take required minimum distributions (RMDs) from traditional retirement accounts by December 31 each year (with an exception for the first RMD, which can be delayed until April 1 of the following year). Failing to take the full RMD results in a 25% penalty on the amount not withdrawn.

If you have multiple IRAs, calculate the total RMD across all accounts but you can withdraw it from any one or combination of accounts. This allows flexibility in managing which investments to liquidate.

Consider whether a qualified charitable distribution (QCD) makes sense if you're 70½ or older. A QCD allows you to donate up to $105,000 directly from your IRA to charity, which counts toward your RMD but isn't included in your taxable income. This is particularly valuable if you don't need the RMD for living expenses and want to support charitable causes tax-efficiently.

Review withholding and estimated payments

As part of your year-end review, check whether you're on track to meet safe harbor requirements for avoiding underpayment penalties. Generally, you're safe if you've paid at least 100% of last year's tax liability (110% if your AGI exceeded $150,000) or 90% of this year's liability through withholding and estimated payments.

If you're short, you can increase withholding from remaining paychecks (withholding is treated as paid evenly throughout the year, even if taken from late-year paychecks) or make a fourth quarter estimated payment. It's better to catch this now than face penalties at filing time.

Education-related tax benefits

If you have education expenses, review available tax benefits. The American Opportunity Tax Credit and Lifetime Learning Credit can reduce your tax bill directly. Additionally, contributions to 529 college savings plans may be deductible on your state tax return (rules vary by state), and the funds grow tax-free for qualified education expenses.

If you're planning 529 contributions, making them before December 31 ensures they count for the current year's state deduction if applicable.

Document everything

Whatever strategies you implement, maintain thorough documentation. Keep receipts for all deductible expenses, records of charitable contributions (including acknowledgment letters for donations over $250), and statements showing retirement account contributions. Good records make tax preparation easier and protect you in case of an audit.