12/03/2024
3 Often-Overlooked Ways to Cut Your Tax Bill Now
Act before 2024 ends to set yourself up for potential savings when it's time to file your tax return.
As the year draws to a close, many people are looking for ways to reduce their tax burden so as not to be surprised when tax season rolls around. Luckily, there are some strategies you can implement now, before December 31, that can lower your federal income tax bill.
1. Fine-tune your tax withholding
One relatively simple but sometimes overlooked way to help manage your tax liability is by adjusting your withholding. (Withholding is the amount of money your employer deducts from your paycheck for federal and state taxes.)
Adjusting your withholding helps ensure you're paying the right tax amount throughout the year. That can help you avoid a large tax bill or refund when tax season arrives.
For example, if you've been over-withholding, you essentially give the government an interest-free loan. You can increase your take-home pay for the remainder of the year by reducing your withholding now.
On the other hand, you've been under-withholding. Increasing your withholding can help you avoid a surprise tax bill and potential penalties when you file your tax return.
To adjust your withholding:
Use the IRS Tax Withholding Estimator to determine if you're on track.
Submit a new W-4 form to your employer if adjustments are needed.
For self-employed individuals, consider adjusting your estimated tax payments.
Remember, the goal is to get as close as possible to your tax liability, not necessarily to receive a large tax refund.
2. Leverage clean energy tax credits (while you still can)
The federal government currently offers tax credits for energy-efficient home improvements under the Inflation Reduction Act (IRA).
By taking advantage of these energy-related tax credits, if you’re eligible, you can potentially lower your tax bill while benefiting from energy cost savings.
Note: Given the outcome of the 2024 presidential election, it’s hard to say whether these clean energy credits will continue to be available beyond the 2024 tax year. (Reuters reports that Donald Trump's transition team plans to eliminate the popular EV tax credit.)
For now, here are some tax credits to consider:
Energy Efficient Home Improvement Credit
Claim up to 30% of qualified expenses, with a $1,200 annual limit for many energy-efficient home improvements
Eligible upgrades include energy-efficient windows, doors, insulation, and specific HVAC systems
An additional credit of up to $2,000 is available for heat pumps, water heaters, and biomass stoves
Residential Clean Energy Credit
Claim up to 30% of costs for solar panels, wind turbines, geothermal heat pumps, and battery storage technology
No maximum dollar amount applies to this credit
EV Tax Credit
If you purchase a qualifying new electric vehicle before year-end, you could be eligible for an EV tax credit of up to $7,500. For used EVs, the credit can be up to $4,000.
Income limits and vehicle price limits apply.
As of January 1, 2024, you can use the EV tax credit at the point of sale to immediately reduce the vehicle's purchase price.
For more information, see How the 2024 EV Tax Credit Works.
To maximize these energy tax credits:
Obtain quotes for eligible improvements or vehicles.
Ensure installations are completed and paid for before December 31st.
Keep detailed records of all purchases and installations.
3. Bunch itemized deductions
With the higher standard deduction introduced in recent years due to the Tax Cuts and Jobs Act (TCJA), some taxpayers find it challenging to itemize.
However, by "bunching" deductible expenses into a single tax year, you may be able to exceed the standard deduction and realize more significant tax savings.
Here are some examples:
Charitable Contributions: Consider making your next year's planned charitable donations by December 31. Also, donor-advised funds allow some to make a significant tax-deductible contribution now (multiple years of gifts in one year) while using the fund assets to spread gifts over time.
Medical Expenses: If your annual qualified unreimbursed medical expenses are close to the 7.5% adjusted gross income (AGI) threshold for medical expense deductions, consider scheduling and paying for elective procedures before year-end.
Property Taxes: Sometimes, you can prepay next year's property tax. Keep in mind, however, the $10,000 cap on state and local tax deductions (SALT).
Mortgage Interest: Making your January mortgage payment in December might give you an extra month of deductible mortgage interest this year.
To implement these strategies:
Review your financial situation and anticipated expenses for the coming year.
Keep good records of all expenses you plan to deduct.
Consider alternating between itemizing and taking the standard deduction in different years to maximize your overall deductions.
Year-end tax moves: Bottom line
Making certain tax moves at year-end can, in some cases, help reduce your tax bill so you’re not shocked when you file your tax return.
