3 Tax Tips for After Year-End

As the year-end rush subsides, you might think you’ve missed your chance for any meaningful tax planning. However, there are still several tax tips you can use to lower your tax bill even after the year is over. Whether you’re a busy physician, a high-income earner, or someone looking to optimize their tax returns, these strategies can still significantly impact your financial health. Let’s dive into three main topics that will help you navigate your post-year-end tax planning.

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Retirement Accounts

IRA Contributions

Traditional IRA

Even after the year ends, you still have a window to make contributions to certain retirement accounts, and these can retroactively affect your tax bill. For Traditional IRAs, the contribution deadline usually extends until the April tax deadline. If you’re looking to get a tax deduction, remember that your Traditional IRA contributions can still be counted toward the previous year’s taxes.

Backdoor Roth IRA

For high-income earners, the Backdoor Roth IRA can be particularly appealing. This involves making a non-deductible IRA contribution and converting it to a Roth IRA.  Remember to ensure that there were no IRA balances on December 31st, as the pro-rata rule could complicate things.

Roth IRA

Direct Contributions

If you prefer making direct contributions to a Roth IRA, you also have until your tax filing deadline. This method is straightforward but requires you to meet specific income eligibility requirements. It’s a great way to contribute post-year-end and still benefit from tax-free growth.

Solo 401(k) and SEP IRA

Solo 401(k)

For self-employed individuals, the Solo 401(k) allows both employer and employee contributions. However, if you didn’t open the account by December 31st, you’re limited to only employer contributions. Despite this, it’s a valuable tool for maximizing retirement savings.

SEP IRA

The SEP-IRA offers more flexibility as it allows contributions up until the tax filing deadline, including extensions. This account is easier to set up and often becomes the go-to recommendation from accountants. Contributions are calculated based on a percentage of your profit, making it easier to integrate with other 401(k) plans.

Comparison of Solo 401(k) and SEP IRA

Pros of Solo 401(k):

1. Higher contribution limits
2. Potential for both employer and employee contributions (if set up by December 31st)

Cons of Solo 401(k):

1. Must be established by year-end for full benefits
2. More paperwork and administrative responsibilities

Pros of SEP IRA:

1. Simple to set up, often only requiring a one-page form
2. Contributions are calculated as a percentage of profit, making it straightforward

Cons of SEP IRA:

1. Strictly based on business profits, which can limit flexibility
2. Can’t integrate employee contributions if you haven’t opened the account by December 31st

Deadlines for Retirement Accounts

• Traditional IRA: April tax deadline (including extensions)
• Roth IRA: April tax deadline (including extensions)
• Solo 401(k): December 31st for full contributions (employer contributions until tax deadline)
• SEP IRA: Tax filing deadline (including extensions)

Health Savings Account (HSA)

Eligibility Requirements

An HSA is a fantastic way to save for medical expenses while enjoying tax benefits. To be eligible, you must have had a high-deductible health plan (HDHP) during the previous year. Even after the year ends, you can still make contributions for the preceding year until the tax deadline.

Contribution Deadline

You have until the April tax deadline to make contributions to your HSA for the previous year. This allows you to still benefit from tax deductions even if you contribute after December 31st.

Tax Benefits

HSAs offer triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for eligible medical expenses are also tax-free. These benefits make HSAs a powerful tool for reducing your taxable income.

Making Contributions

Through Employer

If you’re employed and have been contributing through payroll deductions, you might need to make additional contributions directly to your HSA. Payroll contributions won’t appear on your pay stub, so make sure to inform your accountant about any direct contributions you make.

Direct Contributions

For business owners or those with separate HSAs, direct contributions are straightforward. Simply contribute directly to your HSA and notify your accountant to ensure everything is accounted for correctly.

529 Plans

State-Specific Considerations

529 plans are excellent for saving for college education, but their tax benefits are state-specific. Some states allow contributions up until their tax filing deadline, while others have a strict December 31st cutoff. Check your state’s rules to optimize your contributions.

State vs. Federal Tax Implications

While 529 plans offer state tax deductions, they’re not deductible at the federal level. Not all states provide tax deductions either, especially those without state income taxes like Florida.

States Offering Tax Deductions

Make sure to check if your state offers tax deductions for 529 plan contributions:

• Some states with tax deductions are New York, Illinois, and Virginia
• No tax deductions (no state income tax): Florida, Texas, and Washington

This is not a full list; you can view a complete list here to see if your state offers a tax deduction.

Quarterly Estimated Tax Payments

Explanation of Quarterly Estimates

Quarterly estimated payments are crucial for those who don’t have taxes withheld throughout the year, such as freelancers or those with substantial 1099 income. Mismanagement can lead to costly underpayment penalties.

Importance of Q4 Payment

The Q4 payment deadline is January 15th, and it’s crucial for minimizing penalties. Even if you missed earlier payments, making your Q4 payment can help reduce some of the penalties you might face.

Scenarios Requiring Quarterly Payments

• Incorrect W-4 withholding: If your W-4 withholding isn’t accurate, you might need to make estimated payments
• 1099 income: Freelancers and independent contractors need to manage their tax payments throughout the year
• Large capital gains: If you’ve sold significant assets, it’s essential to account for the resulting tax liabilities
• Also, if you are completing Roth Conversions (not the same as a Backdoor Roth IRA), that is another good reason to add a quarterly tax estimate(s)

Underpayment Penalty

The underpayment penalty has increased to 8%, making it more critical than ever to stay on top of your estimated payments. Check your 1040 form to see if you’ve been penalized for underpayment.

Safe Harbor Rules

To avoid penalties, aim to pay at least:

• 90% of your current year’s tax liability
• 100% of the previous year’s tax liability (110% for high-income earners with household income above $150,000)

Calculating Safe Harbor Amounts

For example, if your previous year’s tax bill was $100,000, your current year’s payments should at least cover $100,000. For high-income earners, this figure adjusts to $110,000.

Adjusting W-4 or Planning for Future Quarterly Payments

Consistency is key. If you’ve had issues this year, adjust your W-4 or plan for quarterly payments to avoid penalties in the future.

Getting Organized for Tax Filing

Creating a Tax Document File

Organization is crucial as you prepare to file your taxes. Start a file with all relevant documents such as:

• Property tax statements
• 1099 forms
• 1098 forms (mortgage interest statements)
• Receipts and other financial documents

Standard Deduction vs. Itemizing

Evaluate whether you should take the standard deduction or itemize. Here are the standard deduction amounts for 2024:

• Married filing jointly: $29,200
• Single: $14,600

Common Itemized Deductions

• Mortgage interest: Typically the biggest itemized deduction.
• State and local taxes (SALT): Capped at $10,000. 👎
• Charitable contributions: Review receipts and contributions made throughout the year.

Home Office Deduction

If you work from a dedicated home office, don’t overlook this deduction. Ensure the space is exclusively used for work and accurately calculate the square footage to maximize your deduction.

Tracking Receipts and Expenses

Maintain a log of all your receipts and expenses to streamline the itemizing process. This practice will help you identify any potential deductions you might otherwise miss.

Additional Considerations

Donor-Advised Funds

For future tax planning, consider using donor-advised funds to bunch charitable contributions together. This strategy can help you exceed the standard deduction threshold and maximize your charitable tax benefits.

Consulting with a Tax Professional

While these tips provide a strong foundation, consulting with a tax professional ensures that your unique financial situation is fully addressed. Their expertise can help you navigate complex tax rules and optimize your returns.

Key Takeaways

1. Retirement Contributions: Maximize your IRA, Roth IRA, Solo 401(k), and SEP IRA contributions even after year-end
2. Health Savings Account: Take advantage of the tax benefits by contributing to your HSA before the tax filing deadline
3. 529 Plans: Optimize state-specific tax benefits by reviewing contribution deadlines and available deductions
4. Quarterly Payments: Avoid penalties by making your Q4 payments and planning for future quarterly estimates
5. Organize and Itemize: Gather your financial documents and evaluate whether to take the standard deduction or itemize

Resources

• IRS Quarterly Estimated Payments: Quick Google search for “IRS quarterly estimated payment dates”
• IRS Form 1040: Check for any underpayment penalties
• State-Specific 529 Plan Information: Review your state’s 529 plan rules for contribution deadlines and tax benefits

Incorporating these tax tips into your financial planning minimizes your current tax burden and sets a solid foundation for future financial health. Thanks for reading, and happy planning!

 

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Disclosures