Reviewing your financial and tax status could help you (and your family) keep more of your earnings as the economy, tax regulations, and your life changes over time. Some tactics apply to the present year, while others entail planning for future developments. Although Tax Day is still months away, there are several tax-planning techniques you may take into account in the interim to help you control your 2025 tax liability. The best tactics to think about before December 31 are listed here, along with some you can think about until Tax Day.
Also Read: Understanding Taxes for Small Businesses in the UK: A Complete Guide
1. Examine whether switching from a regular IRA to a Roth is a wise move.
The pretax savings in a traditional IRA can be converted to a Roth IRA to take advantage of the tax-free withdrawals in retirement if your income surpasses the Roth IRA contribution limits (see "Contribute to a Roth IRA"). Also, it's crucial to keep in mind that IRA conversions won't result in the 10% additional tax on early distributions at the time of the conversion; however, if the converted amounts are taken out of the Roth IRA before the special five-year holding period beginning in the conversion year is satisfied, the 10% additional tax may be applied later on.
2. Make the most of your retirement plan.
To reach the maximum contribution amount, consider raising your contributions to your 401(k), IRA, or other eligible retirement plan. This will potentially reduce your taxable income in addition to giving you the chance to increase your retirement savings.
Nevertheless, if you can afford it, think about making the maximum contribution to 401(k)s and similar plans in 2024, which is $23,000 ($30,500 if you are 50 or older). In addition to lowering your current year's taxable income and increasing your total savings, this can also be a smart tax planning move if you anticipate that your retirement tax rate will be lower than it is now.
3. Maintain a record of your remote work locations outside of your state or nation.
Remote employment has become commonplace for millions of workers. It's critical to think about the tax ramifications, particularly if you live in a state other than the one where your employment is located. The term "residency" is defined differently by each state and can involve having a home there, staying there permanently, or being there for a set amount of time.
Keep meticulous records of the days you spend working in various places to assist prevent penalties. You should also consult your tax expert about the most recent regulations in the states where you live, work remotely, and operate your business.
4. Take into account both a Roth rollover and after-tax contributions to an employment plan.
By avoiding the income restrictions of a Roth IRA and the tax ramifications of a standard Roth conversion, this tax-planning technique may enable high-income individuals to save even more in a Roth account. You should convert or roll over those funds as soon as possible to a Roth 401(k) or to a Roth IRA (often referred to as a mega-backdoor Roth conversion) to avoid paying taxes on any further investment gains. You would use this tax-planning technique to convert your conventional IRA to a Roth IRA after making an after-tax contribution to your traditional IRA up to $7,000 ($8,000 if you are 50 or older) for the 2024 tax year.
5. Effectively cover medical expenses
You may be able to set aside pretax or tax-deductible contributions to health savings accounts (HSAs) or health flexible spending accounts (FSAs) to cover specific medical costs that your insurance does not cover. Unlike a health FSA, one significant advantage of an HSA is that you are not required to spend the entire amount in your account each year. Contributions to a health FSA often need to be used within the same plan year. For instance, you have until April 15, 2025, to submit your 2024 contribution. Health FSA contributions, on the other hand, are typically only chosen during open enrollment or when you start working for a firm.
In Conclusion
Making proactive financial decisions is necessary for effective tax preparation, which is a year-round activity. You can maximize your tax benefits and ensure financial security by considering the aforementioned measures before December 31 and maintaining your tax-conscious activities until Tax Day. Careful tax planning can result in significant savings, whether it is for tracking the tax implications of remote work, optimizing retirement contributions, or budgeting for medical costs. You can take advantage of every chance to reduce your tax liability by speaking with a tax expert.
Frequently Asked Questions (FAQs)
Which states have different taxes on remote work?
The residency and tax laws vary by state. You can avoid penalties and comply with state tax regulations by keeping track of your workplace and seeking advice from a tax professional.
A mega-backdoor Roth conversion: what is it?
The practice of high-income taxpayers making after-tax contributions to a standard IRA or 401(k) and then converting them to a Roth IRA to enable further tax-free savings is known as a mega-backdoor Roth conversion.
When it comes to tax planning, should I speak with a tax expert?
Indeed, a tax expert can help you maximize your tax strategy and offer tailored guidance based on your financial circumstances.
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