As the year comes to a close, it’s essential to make smart financial and tax planning decisions to minimize your tax burden. If you’re a high-income W-2 earner, there are several strategies that can help you reduce your taxable income and set yourself up for long-term financial success. Here’s a comprehensive list of 20 impactful tax planning moves you should consider before the year ends.
1. Max Out Your Retirement Contributions
Contributing the maximum amount to your retirement accounts, such as a 401(k), 403(b), or 457 plan, can help lower your taxable income for the year while boosting your long-term savings.
2. Contribute to a Backdoor Roth IRA
If you’re unable to contribute directly to a Roth IRA due to income limits, consider using the backdoor Roth IRA strategy. You have until the tax filing deadline to make your contribution, and it allows you to enjoy tax-free growth and withdrawals in retirement.
3. Fund Your Health Savings Account (HSA)
An HSA provides triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. If possible, invest the funds instead of using them immediately to maximize the benefits.
4. Contribute to a 529 Plan
Take advantage of state tax benefits by contributing to a 529 plan for education savings. This is a great way to plan for future education expenses while reducing your current taxable income.
5. Use Your Dependent Care FSA Funds
If you have a Dependent Care Flexible Spending Account (FSA), use the funds before the year ends to cover eligible expenses. This helps reduce your taxable income and ensures you don’t forfeit unused funds.
6. Spend FSA Funds Before Year-End
Many FSAs are “use-it-or-lose-it,” so make sure to spend any remaining funds before December 31 to avoid losing them. This also maximizes your tax savings for the year.
7. Engage in Tax Loss Harvesting
Sell losing investments to offset capital gains and reduce your taxable income. Year-end is an ideal time to accelerate this process and take advantage of tax savings.
8. Take Advantage of Tax Gain Harvesting
If you have investments that have appreciated, consider selling them to take advantage of lower tax brackets, especially if you have realized losses to offset the gains.
9. Plan for Next Year’s ESPP Contributions
Evaluate your Employee Stock Purchase Plan (ESPP) options for the upcoming year. By planning ahead, you can maximize the potential benefits of this employee benefit.
10. Sell ESPP Shares That Became Yours in December
If your ESPP shares become yours in December, consider selling them to lock in the discount. This can be a smart move to secure gains while managing your tax exposure.
11. Execute Roth Conversions
Consider converting traditional IRA funds to a Roth IRA, especially if you’re in a lower tax bracket this year. This move allows for tax-free growth and provides long-term tax benefits.
12. Exercise Incentive Stock Options (ISOs) Up to the AMT Threshold
Exercising ISOs up to the Alternative Minimum Tax (AMT) threshold can help you take advantage of tax breaks while managing your tax liability. Be sure it aligns with your financial goals before proceeding.
13. Exercise Non-Qualified Stock Options (NSOs) Wisely
If you have NSOs, evaluate whether exercising them makes sense based on your current tax situation. Be mindful of where your income falls within the tax brackets.
14. Review Your Paycheck Withholding
Check your paycheck withholding to ensure you’re setting aside enough to cover your tax liability. Adjusting your withholding now can help prevent surprises when tax season arrives.
15. Consider a Mega Backdoor Roth IRA
If your employer allows it, a Mega Backdoor Roth IRA can be a game-changer for high-income earners. This strategy allows you to contribute more to your retirement savings by bypassing traditional contribution limits.
16. Make Charitable Donations
Donating to charity not only supports causes you care about but can also reduce your taxable income. Consider bunching donations or using a donor-advised fund to maximize your charitable deductions.
17. Donate Appreciated Securities
If you have appreciated securities, donate them to charity before selling. This allows you to avoid capital gains tax while still receiving a charitable deduction.
18. Perform a Cost Segregation Study
If you own property, a cost segregation study can help you take advantage of bonus depreciation, reducing your taxable income significantly. This can be particularly beneficial for commercial real estate owners.
19. Invest in a Qualified Opportunity Zone
Investing in a Qualified Opportunity Zone allows you to defer large capital gains and potentially benefit from tax-free growth, making it a valuable strategy for high-net-worth individuals.
20. Prepay Property Taxes
Consider prepaying your property taxes to maximize your deductions, especially if you’re married and subject to the $10,000 cap on state and local tax (SALT) deductions.
Conclusion
These year-end tax strategies can significantly reduce your tax liability and help you build wealth over time. Take the time to review your options, consult with a tax advisor, and implement the strategies that best fit your financial situation. Your future self will thank you for taking action now!
