As the year draws to a close, the significance of tax planning for both individuals and small businesses becomes ever more apparent. Proactive tax planning can unlock a variety of tax-saving opportunities and ensure you are well-positioned financially when tax season arrives. Though many only focus on taxes during the filing season, implementing year-end strategies can help reduce your tax burden and save money.
In this blog, we will delve into effective year-end tax planning strategies for both individuals and small businesses that you can implement to minimize taxes and achieve your financial goals.
Why Year-End Tax Planning Matters in Idaho
Year-end tax planning is crucial as it allows you to leverage tax deductions and credits that may no longer be available once the calendar year ends. By reviewing your income, expenses, and investments now, you can ensure that you take advantage of these opportunities. Here are some key reasons why year-end tax planning is essential, especially in Idaho:
- Maximize Deductions: Certain deductions and credits must be claimed by December 31. If you miss these opportunities, you’ll have to wait another year to take advantage of them.
- Reduce Tax Liability: Strategic management of income, expenses, and investments allows you to lower the amount of taxable income reported, resulting in lower taxes owed.
- Avoid Penalties: By planning ahead, you can avoid penalties for underpayment or missed estimated tax payments.
- Prepare for Changes: Tax laws are constantly evolving. Staying proactive ensures that you are well-prepared to adapt to any new tax legislation that could affect your financial situation.
Now that we’ve covered the importance of year-end tax planning, let’s explore specific strategies for both individuals and small business owners in Idaho.
Strategies for Individuals in Idaho
1. Maximize Retirement Contributions
One of the most effective ways to reduce taxable income is by contributing to retirement accounts such as a 401(k) or traditional IRA. Contributions to these accounts are tax-deductible, lowering your taxable income for the year.
For 2024, the contribution limit for a 401(k) is $22,500 (or $30,000 for those over 50), and for an IRA, the limit is $6,500 (or $7,500 for those over 50). By maximizing your contributions, you not only reduce your current tax liability but also bolster your financial security for the future.
2. Harvest Tax Losses
If your investments have underperformed, tax-loss harvesting can help mitigate your tax burden. By selling underperforming investments before year-end, you can offset capital gains, thus reducing your taxable income.
Capital losses can offset capital gains on a dollar-for-dollar basis. If your losses exceed your gains, you can use up to $3,000 of capital losses to offset other income, such as wages.
3. Make Charitable Contributions
Making donations to charitable organizations offers significant tax benefits. For taxpayers who itemize, charitable contributions reduce taxable income. Be sure to keep thorough records of all donations, as you’ll need these to claim deductions.
In 2024, Idaho taxpayers can deduct cash donations up to 60% of their adjusted gross income (AGI). Consider donating appreciated stocks or other assets to avoid capital gains taxes while still claiming the full charitable deduction for the asset’s value.
4. Take Advantage of the Standard Deduction
The standard deduction for 2024 is $13,850 for single filers, $27,700 for married couples filing jointly, and $20,800 for heads of households. If your itemized deductions are lower than the standard deduction, it may be wise to take the standard deduction.
If your itemized deductions are close to the standard deduction amount, you might consider “bunching” deductions such as charitable donations or medical expenses into one year to maximize tax savings.
5. Review Medical Expenses
Medical expenses can be deducted if they exceed 7.5% of your AGI. If you’ve had significant medical expenses, consider paying any outstanding medical bills before year-end to increase your deductible amount.
Eligible expenses include medical insurance premiums, out-of-pocket medical costs, dental care, prescription drugs, and long-term care insurance premiums.
Strategies for Small Businesses in Idaho
1. Defer Income and Accelerate Deductions
A common tax strategy for small business owners is to defer income to the next year and accelerate deductible expenses into the current year. This could mean delaying sending out invoices until January to push income into the next tax year, or prepaying for expenses like rent, supplies, or utilities to claim them in the current year.
This strategy is particularly beneficial if you expect to be in a lower tax bracket next year or if your business had an unusually high income this year.
2. Take Advantage of Section 179 Expensing
Section 179 allows small businesses to immediately expense the full cost of qualifying equipment and property. The deduction limit for 2024 is $1.16 million, with a phase-out threshold at $2.89 million.
If you are planning significant equipment purchases, consider making those purchases before year-end to take advantage of the Section 179 deduction.
3. Review the Qualified Business Income Deduction (QBI)
The Qualified Business Income (QBI) deduction allows eligible business owners to deduct up to 20% of their qualified business income. However, this deduction is subject to income limits and phaseouts.
If your income is near the threshold, consider deferring income or increasing retirement contributions to reduce your taxable income and qualify for the full QBI deduction.
4. Use Bonus Depreciation
Bonus depreciation allows businesses to write off 100% of the cost of qualifying assets placed in service by the end of the year. This applies to assets like machinery, equipment, and certain property improvements.
Bonus depreciation is set to phase out after 2026, so take advantage of it while it lasts for substantial tax savings.
5. Review Employee Benefit Plans
Offering retirement plans, Health Savings Accounts (HSAs), or Flexible Spending Accounts (FSAs) for employees can provide tax advantages for both the employer and the employees. Employer contributions to these plans are typically tax-deductible, reducing the business’s overall tax liability. If you are self-employed, consider contributing to a solo 401(k) or SEP IRA to gain similar tax benefits.
Stay Informed on Tax Law Changes in Idaho
Tax laws are always changing, and keeping up with these changes is vital for effective year-end tax planning. Whether changes in Idaho state law or federal tax law, staying informed helps you adapt and make the most of tax-saving opportunities.
