December is here, and if you are like most people, you are not quite sure how it snuck up on us so quickly. With Thanksgiving having occurred so late in November, remaining time is unusually short for planning and completing transactions prior to the New Year. Financially, we should all be tidying up what we can by planning for what we should do in the remaining days of 2024. We have compiled a short checklist of items that affect many Americans.
Lessening our 2024 tax bills (due next April) should be a top priority for every taxpayer. While 2024 IRA deposits can be made up to April 15, 2025, anyone planning a first-time 2024 Roth IRA contribution should consider opening that account in December, even if only with a small contribution. The reason for this is the 5-year period required for all Roth funds to become penalty-free. One full year is credited to the five-year history regardless of how many days the account was actually funded. The balance of the 2024 deposit can be made in early 2025.
People ages 50 and up are allowed to make additional (“catch-up”) IRA contributions each year, up to the $1,000 statutory (fixed) limit. While we were disappointed that this number did not increase for next year, it is nonetheless available to help our tax bills for 2024. (Catch-up contributions are meant to make up for lost time for late-starting savers, and apply to anyone of age.
Participants in 401(k)-type Plans make deposits through salary reduction deferrals from payroll, which can only be applied to the year of the actual deferral. Some employees may be able to increase their deferrals before the end of December to decrease taxable income, but hurry, as it is a busy time for HR Departments across the country. The maximum 2024 deferral is $23,000, and rises to $23,500 for 2025. In both cases, participants ages 50 and over by year-end may add up to $7,500 annually for “catch-up” contributions.
We should also note that participants ages 60, 61, 62, and 63 at year-end may increase their Retirement Plan “catch-up” contributions to a maximum of $11,250 for each of these years. While this represents a short period of working time, the extra contributions can only help, once retirement becomes a reality. Again, the purpose of these higher limits is to help late starters increase retirement income.
Medical Expenses are deductible, but only in excess of 7.5% of the taxpayer’s Adjusted Gross Income (AGI, usually located on line 11 of your Form 1040 Tax Return). Managing the timing of payment of medical expenses can reduce tax bills for itemizers. Pay this year if you can itemize deductions in 2024, or delay payment until 2025 if you will have a better opportunity then.
Tax Planning is truly a year-round activity. The more you know, the less income tax you may have to pay. What a great Christmas gift to yourself.
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