As the year draws to a close, it’s the perfect time to review your financial plan and make strategic decisions that can benefit you both now and in the future. For women in their 60s and beyond, year-end tax planning and charitable giving are two crucial areas to focus on. Not only can these strategies help you manage your tax liabilities, but they also allow you to support causes that are important to you. Here’s an outline to help you navigate these aspects effectively.
Understanding Year-End Tax Planning
Year-end tax planning involves reviewing your financial activities throughout the year and adjusting items to optimize your tax situation. Here are some key steps to consider:
Review Your Income and Deductions
Assess your total income for the year, including any retirement distributions, investment income from dividends, interest, or capital gains, and other sources like social security.
Identify potential deductions, such as medical expenses, mortgage interest, retirement contributions and charitable contributions.
Maximize Retirement Contributions
Contributing to retirement accounts like IRAs or 401(k)s can reduce your taxable income. For 2024, the contribution limit for a traditional or Roth IRA is $7,000 if you’re over 50. You must have earned income to qualify though.
Consider making catch-up contributions if you haven’t already maxed out your retirement accounts, if you’re still working.
Harvest Tax Losses
If you have investments that have lost value, consider selling them to offset gains from other investments. This strategy, known as tax-loss harvesting, can help reduce your taxable income. This should be done in conjunction with advice from your tax advisor.
Plan for Required Minimum Distributions (RMDs)
If you’re over 73, you’re required to take RMDs from your retirement accounts. Ensure you withdraw the correct amount to avoid hefty penalties. You must do this by December 31st.
Consider a Roth Conversion
Converting a traditional IRA to a Roth IRA can be beneficial if you expect to be in a higher tax bracket in the future. This move requires paying taxes on the converted amount now, but future withdrawals will be tax-free. This is another strategy to run by your Wealth and Tax Advisors.
The Benefits of Charitable Giving
Charitable giving not only supports the causes you care about but can also provide significant tax benefits. Here’s how to make the most of your charitable contributions:
Qualified Charitable Distributions (QCDs)
If you’re 70½ or older, you can make a QCD of up to $100,000 directly from your IRA to a qualified charity. This distribution counts towards your RMD and is excluded from your taxable income. The amount can be small also, so this is something to consider.
Itemizing Deductions
If your total itemized deductions exceed the standard deduction, you can deduct charitable contributions. Keep records of all donations, including receipts and acknowledgment letters from charities. This will also help your tax advisor come tax filing season.
Donor-Advised Funds (DAFs)
A DAF allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. This is a great way to manage your charitable giving strategically. The standard deduction rules still apply so be sure you understand what you are signing up for before you establish a DAF.
Bunching Contributions
If your itemized deductions are close to the standard deduction, consider bunching charitable contributions into one year. This means making two or more years’ worth of donations in one year to maximize your itemized deductions.
Gifting Appreciated Assets
Donating appreciated stocks or other assets can be more tax-efficient than giving cash. You can avoid paying capital gains tax on the appreciation and deduct the fair market value of the asset. This is another item to run by your tax advisor BEFORE you make the donation.
Practical Tips for Effective Charitable Giving
Research Charities
Ensure the charities you support are reputable and align with your values. Websites like Charity Navigator and GuideStar provide ratings and financial information on various nonprofits. It’s important to know what your money is going to go towards within the organization.
Set a Budget
Determine how much you can afford to give without compromising your financial security. Consider setting up a charitable giving budget as part of your overall financial plan.
Involve Your Family
Discuss your charitable goals with family members. This can be a great way to pass on your values and involve them in the giving process.
Review Your Plan Annually
Regularly review and adjust your charitable giving plan to reflect changes in your financial situation and philanthropic goals.
Conclusion
Year-end tax planning and charitable giving are powerful tools that can help you manage your finances and make a positive impact. By taking the time to review your financial situation and make strategic decisions, you can optimize your tax benefits and support the causes you care about. Remember, it’s always a good idea to consult with a financial advisor and tax advisor to help ensure you’re making choices that align with your financial situation.
Let’s Have a Conversation:
Do you use certain strategies at the end of the year to plan for better tax outcomes? What do you usually do? Do you give to charities to minimize your taxes?
