As the year draws to a close, high earners have a valuable opportunity to review their finances and take steps to potentially reduce their tax liability. Year-end tax planning is particularly important for those in higher tax brackets, where strategic moves can lead to meaningful savings. Actions like maximizing deductions, reviewing investment portfolios, and evaluating charitable contributions can help optimize your tax position. 

Since everyone’s financial situation is different, tailored advice can make these strategies more effective. Consulting with a financial or tax professional can help identify opportunities that align with your individual goals and circumstances before the tax year ends. 

Assess Your Income and Tax Bracket 

One of the first steps in year-end tax planning is taking a close look at your total income for the year and determining your tax bracket. Understanding where you fall can help identify opportunities to minimize taxes or make adjustments that may provide longer-term financial benefits. 

For high earners, staying within a lower tax bracket might be a viable strategy, depending on your income and deductions. This could involve deferring additional income into the next tax year or increasing contributions to tax-advantaged accounts like 401(k)s or health savings accounts (HSAs). Such moves may reduce your taxable income, potentially lowering your overall tax rate. 

It’s also important to consider how income thresholds affect the availability of certain deductions and credits. For example, higher income levels may phase out eligibility for tax breaks like the Child Tax Credit or certain education-related deductions. By proactively assessing where your income falls relative to these thresholds, you can better plan for the impact and explore strategies to make the most of the benefits available to you. 

Maximize Contributions to Retirement Accounts 

Contributing to retirement accounts is one of the most effective ways high earners can reduce taxable income while building long-term financial stability. As the year draws to a close, there’s still time to make last-minute contributions to accounts such as 401(k)s, 403(b)s, and IRAs. These contributions not only help lower your current taxable income but also provide opportunities for tax-deferred or tax-free growth, depending on the account type. 

If you’re 50 or older, you may be eligible for catch-up contributions, which allow you to contribute more than the standard limit to certain retirement accounts. For example, in 2024, individuals can contribute an additional $7,500 to their 401(k) plans, on top of the standard $22,500 limit. This can be a valuable strategy for high earners looking to maximize their retirement savings while also reducing their tax liability. 

Another consideration is whether a Roth conversion might benefit your financial situation. Converting traditional IRA funds into a Roth IRA allows for tax-free growth and withdrawals in the future. While the converted amount is subject to income tax in the year of conversion, it can be a strategic move for high earners expecting higher tax rates in retirement. Careful planning is essential to determine if the tax impact of a Roth conversion aligns with your overall financial goals. 

Leverage Charitable Giving 

Charitable giving is a powerful way to support causes you care about while also reducing your taxable income. High earners have several options for making tax-deductible donations, including cash, appreciated stocks, or contributions to donor-advised funds. Each method offers unique benefits, and choosing the right one can help maximize the impact of your generosity while also providing tax advantages. 

For those looking to make larger contributions, the strategy of bunching donations can be particularly effective. Instead of spreading smaller donations across multiple years, you can consolidate several years’ worth of giving into a single tax year. This approach may allow you to exceed the standard deduction threshold and itemize deductions, which can result in greater tax savings. 

If you’re over 70½ and have a traditional IRA, you may also consider a qualified charitable distribution (QCD). A QCD allows you to donate directly from your IRA to a qualified charity, up to $100,000 annually. This type of distribution satisfies required minimum distributions (RMDs) without increasing your taxable income, making it an excellent option for retirees looking to reduce their tax obligations. 

Consider Tax-Loss Harvesting 

Tax-loss harvesting is a strategy that allows investors to use losses on underperforming investments to offset capital gains and potentially reduce taxable income. This involves selling investments that have decreased in value to realize a loss, which can be used to offset gains from other investments. If total losses exceed gains, up to $3,000 of those losses can be applied to reduce ordinary income, with any remaining losses carried forward to future tax years. 

For example, if you’ve realized significant gains from selling appreciated stocks earlier in the year, selling underperforming investments could help balance those gains. This approach also offers an opportunity to adjust your portfolio’s allocation to better align with your financial strategy and risk tolerance. 

It’s critical, however, to be aware of wash sale rules. These rules prevent the tax benefit of a realized loss if the same or substantially identical security is repurchased within 30 days before or after the sale. Understanding and following these rules is key to effectively using tax-loss harvesting as part of your year-end planning. 

Prepay Certain Expenses 

Prepaying certain expenses before the end of the year can be a valuable strategy for high earners. For example, if you own a home, prepaying property taxes or mortgage interest could allow you to claim those payments as deductions in the current tax year, potentially reducing your taxable income. This can be especially beneficial if your deductions will exceed the standard deduction, making itemizing worthwhile. 

In addition to prepaying expenses, you might also consider timing strategies such as deferring income or accelerating deductions. For example, if you expect to be in a lower tax bracket next year, deferring income into the next tax year could help you avoid higher taxes this year. Conversely, if you expect higher income or a reduced ability to claim deductions in the future, accelerating deductible expenses, like medical bills or charitable contributions, could provide more immediate benefits. 

Utilize Flexible Spending Accounts (FSAs) 

If you have a flexible spending account (FSA) through your employer, now is the time to review your balance and use the funds before the year-end deadline. FSAs are “use-it-or-lose-it” accounts, meaning any unspent funds may be forfeited at the end of the plan year or after a grace period, depending on your employer’s policy. 

To avoid losing these funds, consider spending them on eligible medical or dependent care expenses. For medical FSAs, qualified expenses may include: 

• Co-pays and deductibles for doctor visits or prescriptions. 

• Over-the-counter medications and medical supplies. 

• Dental work, such as cleanings, fillings, or braces. 

• Vision care, including glasses, contact lenses, or eye exams.
  

For dependent care FSAs, eligible expenses often include: 

• Daycare or after-school care for children under 13. 

• Pre-school or nursery school tuition. 

• Care for a disabled dependent or spouse.
  

Check your FSA plan details to confirm which expenses are covered and the deadline for using funds. If you’re unsure how to spend your remaining balance, your FSA provider may offer tools or lists of qualifying purchases.  

Prepare for Future Tax Changes 

Tax laws are subject to change, and staying informed about upcoming adjustments can help high earners make better decisions before the year ends. Anticipated changes for the next tax year—such as updates to income thresholds, deduction limits, or capital gains tax rates—can significantly impact your financial strategy. For example, if income tax rates are expected to rise, deferring income into the following year might not be the best approach, while accelerating deductions could become more valuable. 

High earners should also keep an eye on potential legislative updates that could affect retirement account contributions, estate taxes, or corporate taxes if applicable. Even small changes to tax laws can have a ripple effect, particularly for those with complex financial situations. 

Conclusion

Year-end tax planning offers high earners an important opportunity to fine-tune their financial strategies and make decisions that could lead to meaningful tax savings. From maximizing retirement contributions to leveraging charitable giving and investment strategies, the actions you take now can help set the stage for a more efficient approach to managing your finances. 

Since tax laws and individual circumstances vary, working with a financial or tax professional can help you identify strategies tailored to your specific goals. Don’t let the year-end deadline pass without exploring all the opportunities available to you. 

If you’d like assistance with your year-end tax planning or have questions about how to optimize your financial strategy, we’re here to help. Contact us today to schedule a consultation and start the conversation

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This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.  

Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.   

Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

Sources

IRS. (n.d.) IRS Provides Tax Inflation Adjustments for Tax Year 2024. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024 

IRS. (n.d.) Child Tax Credit. https://www.irs.gov/credits-deductions/individuals/child-tax-credit 

Lam-Balfour, Tiffany. (May 23, 2023). Getting Started With Qualified Opportunity Funds. NerdWallet. https://www.nerdwallet.com/article/investing/qualified-opportunity-funds 

Scott, Gordon. (November 5, 2024). Wash Sale: Definition, How It Works, and Purpose. Investopedia. https://www.investopedia.com/terms/w/washsale.asp 

Scott, Michelle P. (October 11, 2024). What Is a Flexible Spending Account (FSA)? Investopedia. https://www.investopedia.com/terms/f/flexiblespendingaccount.asp 

Yochim, Dayana. (August 29, 2024). Tax-Loss Harvesting: What It Is, How It Works. NerdWallet. https://www.nerdwallet.com/article/taxes/tax-loss-harvesting