Year-End Tax Considerations

You may be able to turn an IRS tax payment into a tax refund if you take some year-end actions now. Consult with your tax professional to determine if any of the following actions apply to your situation.

Standard deduction versus itemized deductions

For many taxpayers, taking the standard deduction is more beneficial than itemizing deductions. However, the following people can’t use the standard deduction:

• A married individual filing as married filing separately whose spouse itemizes deductions
• An individual who was a nonresident alien or dual-status alien during the year (although some exceptions apply)

As a result, if you find yourself in one of these two categories, you might want to see whether you can accelerate any future deductible expenses into the current year.

Additionally, if you are eligible to use the standard deduction but anticipate substantial itemized deductions over a two-year period (e.g., medical and/or dental expenses, state taxes, charitable contributions), it may be more beneficial to collect those deductions into this year or next year to the extent they will exceed the standard deduction. The net total for the two years will be a larger deduction than if you just take the standard deduction each year. If this is a possibility, it would be advantageous to review your situation with a tax professional.

Retirement plan contributions

You can realize substantial tax savings, while also feathering your nest, by maxing out deductible contributions to certain qualified retirement plans. The 2024 contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan, is $23,000. If you are age 50 or over, these amounts are increased by $7,500.

For individual retirement accounts, the limit on the annual deductible contribution is $7,000 for those under 50 and $8,000 for those 50 and older. However, eligibility to deduct retirement plan contributions depends on the amount of income you earned in 2024. Additionally, if you qualify, serious consideration should be given to opening a Roth IRA account. While the contributions are nondeductible, subsequent distributions from the Roth IRA are tax-free.

Determining the right retirement plan can be complicated. Reaching out to a retirement plan adviser for help in creating a personalized plan for your future can save you money and headaches in the long run.

Expenses relating to the business use of your home

Generally, you can’t deduct expenses relating to your home. However, special rules allow you to deduct expenses connected to certain business or rental uses of your home, subject to limitations. Calculating the actual expenses can be complex and time-consuming for small business owners.

As a result, the IRS has provided an optional safe harbor method to reduce the administrative and compliance burdens of determining the deduction. Under this method, the deduction is determined by multiplying a prescribed rate by the square footage of the portion of your home that is used for business purposes.

Your deductible expense is calculated by multiplying the allowable square footage by $5. The allowable square footage cannot exceed 300 square feet. Thus, the maximum deduction under this method is $1,500. You may, however, be eligible for a larger deduction if you use more than 300 square feet of your home. If that is the case, it would be wise to seek the assistance of a tax professional to help with those more complex calculations.

Indeed, no matter what your tax situation is, year-end conversations with your tax professional may result in tax savings.