Avoid These Costly Year-End Tax Mistakes and Save More Money

1. Missing Deduction Opportunities

As the year comes to a close, its crucial to take full advantage of all available tax deductions to lower your taxable income. Many taxpayers overlook valuable deductions that could save them a significant amount of money. Here are some common deductions you should consider before the year ends:

(1) Charitable Donations

If youve made charitable contributions throughout the year, be sure to keep receipts and documentation. Donations made to qualified organizations can be deducted from your taxable income, helping you save on taxes while supporting a good cause.

(2) Mortgage Interest

Homeowners can deduct mortgage interest paid on their primary and sometimes secondary residences. This deduction can lead to substantial tax savings, so ensure that youve accounted for all eligible interest payments.

(3) Student Loan Interest

If youre repaying student loans, you may be eligible to deduct up to $2,500 in interest paid during the year. This deduction applies even if you dont itemize your taxes, making it a great way to reduce taxable income.

(4) Medical Expenses

Certain medical expenses that exceed a specific percentage of your adjusted gross income (AGI) may be deductible. Keep track of out-of-pocket expenses such as prescriptions, doctor visits, and medical procedures that arent covered by insurance.

(5) Work-Related Expenses

If youre self-employed or work in a profession with significant job-related expenses, consider deductions for business supplies, home office costs, and travel expenses. These deductions can help offset your taxable income.

Quick Reference Table: Common Deduction Opportunities

By reviewing these deduction opportunities now, you can maximize your tax savings before the year ends. Make sure to gather all necessary documentation and consult a tax professional if needed to ensure youre not leaving money on the table.

Overlooking Tax-Advantaged Retirement Contributions

One of the biggest year-end tax mistakes people make is not taking full advantage of tax-advantaged retirement accounts. Contributing to these accounts can significantly lower your taxable income while helping you build a more secure financial future.

Why Maximizing Contributions Matters

The IRS sets annual contribution limits for various retirement and savings accounts, and maximizing these contributions before the deadline can provide multiple benefits:

• Reduce Taxable Income: Contributions to traditional 401(k)s and IRAs are tax-deductible, lowering the amount of income that is subject to taxation.
• Boost Retirement Savings: The more you contribute now, the more your investments can grow over time through compound interest.
• Take Advantage of Employer Matching: Many employers offer matching contributions for 401(k) plans. Not contributing enough means leaving free money on the table.

Contribution Limits for 2024

The IRS updates contribution limits annually, so it’s important to stay informed and adjust your savings accordingly. Below are the 2024 limits for common tax-advantaged accounts:

(1) Max Out Your 401(k) Contributions

If your employer offers a 401(k) plan, try to contribute as much as possible before December 31. If you can’t reach the maximum limit, at least contribute enough to get any employer match available.

(2) Dont Forget About IRAs

You have until April 15 of the following year to make IRA contributions for the current tax year. However, making contributions before year-end can help with better financial planning.

(3) Use an HSA for Additional Tax Savings

If you have a high-deductible health plan (HDHP), contributing to an HSA allows you to save on taxes while covering medical expenses. HSA contributions are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

3. Ignoring Tax Loss Harvesting

As the year comes to an end, one of the most effective ways to reduce your tax bill is by utilizing tax loss harvesting. This strategy involves selling investments that have lost value to offset capital gains and potentially lower your taxable income.

How Tax Loss Harvesting Works

Tax loss harvesting allows investors to balance out gains with losses, minimizing the amount of taxes owed on investment income. Here’s a simple breakdown:

Key Benefits of Tax Loss Harvesting

• Lowers taxable income: By offsetting capital gains, you can reduce the amount subject to taxation.
• Carries forward unused losses: If your losses exceed your gains, you can use up to $3,000 per year to offset ordinary income and carry forward any remaining losses for future years.
• Keeps your portfolio balanced: Selling underperforming assets allows you to reinvest in better opportunities while optimizing your tax situation.

Avoid the Wash Sale Rule

The IRS has a rule known as the wash sale rule, which prevents investors from claiming a tax loss if they repurchase the same or a “substantially identical” security within 30 days before or after the sale. To comply with this rule:

(1) Wait 31 Days Before Rebuying the Same Security

If you want to repurchase the same stock or fund, wait at least 31 days after selling it at a loss.

(2) Consider Alternative Investments

If you want to maintain exposure in a specific sector or asset class, consider buying a similar (but not identical) investment instead.

(3) Use Tax-Advantaged Accounts Strategically

Avoid selling in taxable accounts while repurchasing in retirement accounts like IRAs, as this can also trigger the wash sale rule.

Take Action Before Year-End

If you have unrealized losses in your portfolio, review them before December 31st. Taking advantage of tax loss harvesting can help you lower your tax bill and keep more money invested for long-term growth.

4. Failing to Plan for Required Minimum Distributions (RMDs)

Avoid costly penalties by withdrawing the required amounts from traditional IRAs and 401(k)s if youre 73 or older. The IRS mandates that individuals start taking Required Minimum Distributions (RMDs) from their retirement accounts once they reach a certain age. Failing to do so can result in significant penalties.

Understanding RMD Rules

Once you turn 73, you must withdraw a minimum amount annually from your tax-deferred retirement accounts, such as traditional IRAs and 401(k)s. If you don’t take the required distribution, you could face a hefty penalty of 25% of the amount you failed to withdraw.

Who Needs to Take RMDs?

(1) How to Calculate Your RMD

The amount you need to withdraw is based on your account balance at the end of the previous year and a life expectancy factor provided by the IRS. You can use an online RMD calculator or refer to IRS Publication 590-B to determine your specific requirement.

(2) When to Take Your RMD

Your first RMD must be taken by April 1 of the year after you turn 73. However, delaying it until April means youll have to take two withdrawals in one year, which could push you into a higher tax bracket.

(3) Ways to Avoid RMD Mistakes

• Set Up Automatic Withdrawals: Many financial institutions allow you to automate RMDs, ensuring you never miss a deadline.
• Diversify Withdrawal Sources: Instead of withdrawing from one account, consider spreading distributions across multiple accounts for better tax efficiency.
• Consider Qualified Charitable Distributions (QCDs): If youre charitably inclined, you can donate up to $100,000 directly from your IRA to a qualified charity, satisfying your RMD requirement while reducing taxable income.
• Consult a Financial Advisor: A professional can help optimize your withdrawal strategy to minimize taxes and maximize savings.

Avoiding RMD mistakes ensures you stay compliant with IRS rules and keeps more money in your pocket instead of paying unnecessary penalties.

5. Forgetting to Check Withholding and Estimated Payments

Reviewing your withholdings and estimated tax payments before the year ends can help you avoid unexpected tax bills or penalties. If you don’t pay enough taxes throughout the year, you might face an underpayment penalty when filing your return in April.

(1) Why Withholding and Estimated Payments Matter

Your employer withholds federal income tax from your paycheck based on the W-4 form you submitted. If youre self-employed or have additional income sources, you may need to make estimated tax payments throughout the year. Failing to adjust these correctly can lead to owing a large amount at tax time.

(2) How to Check Your Withholding

Use the IRS Tax Withholding Estimator tool to ensure youre on track. If necessary, submit a new W-4 form to your employer to adjust your withholdings.

(1) Steps to Review Your Withholdings:

1. Gather your most recent pay stubs and last year’s tax return.
2. Use the IRS Tax Withholding Estimator tool.
3. If needed, complete a new W-4 form and submit it to your employer.

(3) Checking Estimated Tax Payments

If youre self-employed or have significant income outside of wages (such as rental income or investments), ensure youve made sufficient quarterly estimated tax payments.

(1) Estimated Payment Deadlines:

(2) How to Avoid Underpayment Penalties:

• Ensure you’ve paid at least 90% of your current-year tax liability or 100% of last years taxes.
• If your income fluctuates, consider adjusting estimated payments each quarter.
• If unsure, consult a tax professional for guidance.