As the year draws to a close, taxpayers often find themselves wondering what they can do to avoid an unpleasant surprise in April. Proper planning and proactive steps taken before year-end can help you minimize your tax liability and set yourself up for a smoother tax season. Optima Tax Relief gives key tips to ensure you're well-prepared for tax season.  

Check Your Withholding 

One of the most common reasons for an unexpected tax bill is under-withholding. If you haven't updated your W-4 form recently, it's worth reviewing. Major life events like marriage, divorce, the birth of a child, or changes in employment can affect how much tax is withheld from your paycheck. The IRS has a tax withholding estimator to help you calculate if you're on track to pay the right amount. 

Make Estimated Tax Payments 

If you're self-employed, a freelancer, or earn additional income outside of a traditional job (like investment gains, rental income, or side gigs), you may need to make quarterly estimated tax payments. These payments ensure that you're paying taxes throughout the year rather than facing a large bill in April. The fourth quarter payment is due by January 15, so now is a good time to assess if your previous payments were sufficient. 

Maximize Retirement Contributions 

Contributing to retirement accounts such as a 401(k) or a traditional IRA not only helps secure your financial future, but it can also lower your taxable income. For 2024, you can contribute up to $23,000 to a 401(k) or $30,500 if you're over 50. You can also contribute up to $7,000 to an IRA, or $8,000 if you're over 50. Contributions made by the end of the year can help reduce your tax burden. It's also important to note that you can continue to contribute to an IRA all the way to the tax deadline in April. 

Harvest Investment Losses 

If you've experienced losses in the stock market, you can sell investments that have lost value to offset capital gains from other investments. This strategy, known as tax-loss harvesting, can reduce your taxable income. You can also use up to $3,000 of net capital losses to offset other income each year, with any excess losses carried forward to future years. 

Bunch Charitable Contributions 

Charitable donations are a powerful way to lower your tax liability if you itemize deductions. If you're close to the standard deduction threshold, consider “bunching” charitable contributions by making multiple years' worth of donations this year. This could allow you to itemize deductions in 2024 and take the standard deduction next year. 

Take Advantage of Tax Credits 

Tax credits are often more valuable than deductions because they directly reduce the amount of tax you owe. Popular credits include the Earned Income Tax Credit (EITC) and the Child Tax Credit. For low- to moderate-income workers, the EITC can significantly reduce taxes owed. Be sure to review income limits and eligibility requirements, especially if your family situation has changed. If you have children under 17, the Child Tax Credit can reduce your tax bill by up to $2,000 per child, depending on your income. Review your eligibility and ensure you've taken full advantage of any applicable credits before year-end. 

Make Use of Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) 

If you have an FSA, be sure to spend the remaining balance on eligible expenses before the end of the year to avoid losing those funds. Keep in mind that some plans offer a grace period or carryover, but many do not. Eligible expenses include medical costs, dependent care, and certain healthcare-related items. For those with an HSA, contributions are tax-deductible and can be used to pay for qualified medical expenses. HSAs offer a triple tax advantage—contributions are tax-deductible, growth is tax-free, and withdrawals for qualified expenses are also tax-free.  

Defer Income or Accelerate Deductions 

If you're close to the next tax bracket, you may want to consider deferring income to the following year, especially if you're anticipating a lower income in 2025. For example, ask your employer to pay year-end bonuses in January rather than December. Alternatively, you can accelerate deductions by prepaying certain expenses like property taxes or mortgage interest before December 31. 

Consult a Tax Professional 

If you have a complex financial situation or significant changes in income, it's wise to consult with a tax professional before year-end. They can help you identify strategies that may lower your tax bill and avoid common pitfalls. Planning ahead and making adjustments now can lead to smoother tax filing and fewer surprises in April. 

Conclusion 

Being proactive with your tax planning at year-end can prevent an unexpected tax bill come April. Review your income, expenses, and available deductions, and make strategic decisions to optimize your financial situation. Taking these steps now can reduce your tax burden and set you up for a successful tax season.