Year-End Tax Planning Checklist: Steps to Prepare for Tax Season

As the year ends, tax planning can help minimize liabilities and reduce stress. A proactive approach ensures you take advantage of deductions, credits, and strategies that lower your tax bill. Reviewing key financial areas and making adjustments before December 31 is essential.

Assessing Total Income

Understanding total income is the foundation of tax planning. This includes wages, self-employment earnings, rental income, dividends, interest, and other revenue. Tracking all sources ensures accurate reporting and identifies tax-saving opportunities.

For freelancers or investors with multiple income streams, tracking earnings can be complex. Form 1099-NEC reports non-employee compensation, while 1099-DIV and 1099-INT detail dividends and interest. Capital gains or losses from asset sales must also be factored in. Failing to account for all income can lead to underreporting and potential IRS penalties.

Different types of income are taxed at different rates. Ordinary income, such as wages and business profits, is subject to progressive tax rates ranging from 10% to 37% in 2024. Long-term capital gains, from assets held for more than a year, are taxed at 0%, 15%, or 20%, depending on taxable income. Understanding these distinctions can help structure income to reduce tax liability.

Adjusting Withholdings and Estimated Taxes

Ensuring the correct amount of tax is paid throughout the year prevents unexpected liabilities. Employees can adjust their withholdings by submitting an updated Form W-4. Self-employed individuals and those with substantial non-wage income may need to make estimated tax payments. The IRS requires estimated payments if tax liability exceeds $1,000 after withholdings and credits. These payments are due quarterly on April 15, June 15, September 15, and January 15 of the following year.

Underpaying taxes can result in penalties, calculated based on the IRS underpayment interest rate, which is adjusted quarterly. In 2024, this rate is 8% for individuals. The penalty applies if payments fall short of 90% of the current year’s tax liability or 100% of the prior year’s tax, increasing to 110% for those earning over $150,000. Using the IRS Form 1040-ES worksheet can help estimate the correct amount to avoid penalties.

Major life changes, such as marriage, divorce, the birth of a child, or purchasing a home, can significantly impact tax liability. Adjusting withholdings accordingly ensures the right amount is withheld. Claiming additional dependents may lower tax liability, while increased freelance income may require higher estimated payments. The IRS Tax Withholding Estimator can help determine necessary adjustments.

Review of Deductible Expenses

Maximizing deductions lowers taxable income. The IRS distinguishes between itemized deductions and the standard deduction. For 2024, the standard deduction is $14,600 for single filers, $29,200 for married couples filing jointly, and $21,900 for heads of household. Taxpayers should determine whether their total itemized deductions exceed these amounts before itemizing.

Medical expenses exceeding 7.5% of adjusted gross income (AGI) can be deducted, including prescription medications, surgeries, and travel expenses for medical care. Mortgage interest on loans up to $750,000 for primary and secondary residences remains deductible, along with state and local taxes (SALT), though the deduction is capped at $10,000. Bundling expenses in a single tax year—such as prepaying property taxes—may increase deductions beyond the standard threshold.

For those who work from home, the home office deduction applies if a portion of the residence is used exclusively for business. The simplified method allows a $5 deduction per square foot up to 300 square feet, while the actual expense method accounts for a percentage of rent, utilities, and maintenance costs. Self-employed individuals may also deduct business-related expenses, such as office supplies, professional memberships, and software subscriptions, provided they are necessary for their trade.

Charitable Contributions

Donating to qualified organizations can provide tax benefits. Contributions to 501(c)(3) nonprofits, religious institutions, and certain government entities are generally deductible. Verifying an organization’s tax-exempt status through the IRS Tax Exempt Organization Search tool ensures eligibility. Donations must be made by December 31 to count for the current tax year, and proper documentation is required.

Cash donations are straightforward, but non-cash gifts such as appreciated securities, real estate, or personal property can offer additional tax advantages. Donating stocks or mutual fund shares that have appreciated for more than a year allows a deduction of the fair market value while avoiding capital gains tax. This strategy benefits high-income earners reducing both ordinary income and investment-related taxes. For donated property valued over $5,000, a qualified appraisal is required.

Retirement Accounts and Contributions

Maximizing retirement contributions before year-end can reduce taxable income while strengthening long-term financial security. Contributions to tax-advantaged accounts, such as 401(k)s, IRAs, and HSAs, provide tax benefits.

Traditional 401(k) plans allow employees to contribute up to $23,000 in 2024, with an additional $7,500 catch-up contribution for those aged 50 and older. Contributions lower taxable income, and earnings grow tax-deferred. Employers may offer matching contributions, which should be maximized. Roth 401(k) contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free, making them valuable for those expecting higher tax rates in the future.

Individual Retirement Accounts (IRAs) provide additional tax savings. The contribution limit for both traditional and Roth IRAs in 2024 is $7,000, with a $1,000 catch-up contribution for individuals over 50. Traditional IRA contributions may be deductible depending on income and participation in an employer-sponsored plan, while Roth IRA contributions are subject to income limits but offer tax-free withdrawals in retirement. Those exceeding the income threshold for direct Roth IRA contributions can use a backdoor Roth strategy by contributing to a non-deductible traditional IRA and converting it to a Roth.

Health Savings Accounts (HSAs), available to those with high-deductible health plans, allow contributions of up to $4,150 for individuals and $8,300 for families in 2024. HSA contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses, making them useful for healthcare savings and retirement planning.

Capital Gains and Loss Harvesting

Managing investment gains and losses before year-end can help optimize tax outcomes. Capital gains from the sale of stocks, real estate, or other investments are taxable, but strategic loss harvesting can offset these gains.

Short-term capital gains, from assets held for one year or less, are taxed at ordinary income rates, which can be as high as 37% in 2024. Long-term capital gains, from assets held for more than a year, are taxed at 0%, 15%, or 20%, depending on taxable income. Selling underperforming investments at a loss can offset capital gains dollar for dollar, reducing taxable income. If total capital losses exceed gains, up to $3,000 of losses can be deducted against ordinary income, with any remaining losses carried forward.

Tax-loss harvesting is particularly useful for high-income investors who face the 3.8% Net Investment Income Tax (NIIT) on capital gains if their modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. However, the IRS wash-sale rule disallows a loss deduction if the same or a substantially identical security is repurchased within 30 days before or after the sale. To maintain market exposure while realizing losses, investors can consider purchasing similar but not identical assets, such as an exchange-traded fund (ETF) tracking the same sector.

Record Organization

Keeping accurate records simplifies tax filing and reduces the risk of errors or audits. Proper documentation ensures all income, deductions, and credits are accurately reported. Digital recordkeeping tools and cloud-based storage solutions can help maintain financial documents securely.

Taxpayers should retain records of income statements, such as W-2s and 1099s, as well as receipts for deductible expenses, charitable contributions, and investment transactions. Self-employed individuals should maintain detailed records of business expenses, mileage logs, and estimated tax payments. The IRS generally requires taxpayers to keep records for at least three years from the date of filing, but records related to property transactions, such as home purchases or stock sales, should be kept longer to establish cost basis.