Early planning can mean smooth sailing for tax season

Preparing in advance for a meeting with a tax professional can make the tax filing process much smoother. Organizing tax forms and making sure the correct documentation is in place in for itemized deductions for example, is critical for success when filing your tax return.

A review of the “2024 tax rates, schedules and contribution limits” may also be helpful to see key tax figures and brackets.

Here are some strategies and reminders that might be helpful when filing taxes this season.

Make sure charitable contributions are in order

• Remember you can only deduct charitable contributions if you are itemizing deductions on your tax return
• For non-cash contributions of $250 or more, the IRS requires a receipt from the organization indicating the dollar amount or description of the property donated. If the noncash contribution exceeds $500, the taxpayer must complete form 8283 (Noncash Charitable Contributions) and provide a detailed description of the property, fair market value, as well as the method for determining the value
• Larger non-cash contributions (over $5,000) require a qualified appraisal
• If you receive a benefit from the contribution (for example, a charity dinner), you can only deduct the difference between the amount donated and the fair market value of the goods or services received
• Depending on the nature of the property donated and the type of organization, the amount of the deduction will vary

Note: If electing to base the deduction on the cost basis of the property instead of the FMV, a 50% of AGI limit applies.

If property is not for related use by the nonprofit organization, the charitable deduction is based on the lesser of FMV or cost basis and the AGI deduction limit is 30%. If property is for related use, the deduction can be based on FMV if greater than the cost basis of the property.

Private (operating) foundations are treated the same as public charities for purposes of deducting charitable contributions. Non-operating private foundations differ from operating foundations since they generally grant funds to other charitable organizations. These foundations do not directly perform any charitable programs or services.

Read our education piece “Understanding charitable giving strategies” for more details. 

Consider a backdoor Roth contribution for 2024

The backdoor Roth strategy may be effective for those who cannot contribute directly to a Roth IRA because their income is too high. For 2024, once income exceeds $146,000 for single filers or $230,000 for married couples, the ability to make a Roth IRA contribution starts to phase out. Instead, you can make a non-deductible (i.e. after tax) contribution into a traditional IRA before the tax filing deadline and then subsequently convert those funds to a Roth IRA. For optimal results, the IRA owner should not hold any pretax savings in an IRA (including a SEP or SIMPLE) due to the pro-rata rule when reporting income on a Roth IRA conversion. Consult with a tax professional before considering this strategy. To learn more about Roth conversions, see “Converting a traditional IRA to a Roth IRA.”

Understand the rules for college savings plan withdrawals

It’s important to ensure withdrawals from college savings accounts, such as 529 plans, occur in the same calendar year as the expenses are incurred. If not, the IRS may consider a portion of distributions from the college savings plan as non-qualified and subject to taxes and penalties. Also, be aware of the tax reporting forms associated with college savings plans and tuition payments that are needed for tax filing. IRS Form 1098T is issued by the college or institution and reports tuition payments and other expenses. This form does not include room and board even though they are considered qualified education expenses when withdrawing funds from a 529 college savings plan. Families should keep records of living expenses as back-up for tax reporting. The custodian for the college savings plan will issue IRS Form 1099Q, which reports total distributions, earnings and contributions. When considering room and board as qualified expenses for students living off campus, make sure those expenses do not exceed comparable expenses published by the school.

There is still time for sole proprietors to make a retirement contribution and reduce income

Self-employed individuals can fund a SEP-IRA or Individual 401(k) (up to a maximum of $69,000 for 2024) and deduct contributions from taxable income if the contribution is made before the tax filing deadline (April 15).

Married couples may consider filing options

Generally, most married couples file a joint tax return. However, there may be circumstances where filing separate returns may make sense. For example, if one spouse has significant student loan debt, filing a separate return may assist in qualifying for an income-driven repayment (IDR) plan. Or, if one spouse has significant medical expenses, filing separately may make it easier to exceed the threshold for deducting medical expenses (deduction is available once expenses exceed 7.5% of income). Consult with a tax professional to determine the best method of filing.

Report rental income if needed

The lodging industry has changed dramatically with the advent of options such as Airbnb. As a result, more people are renting out their homes and properties for short-term stays. In general, if you rent your property for more than 14 days during the year, you must report that income on your tax return. For more information on the tax rule, view the IRS discussion of this topic “Rental income and expenses.”

Adjust withholding for 2025 if necessary

While reviewing tax forms and records for 2024 consider making changes to withholding if it appears that underpayment of taxes may be an issue. The IRS may impose penalties and interest for underpayment of taxes. Generally, most taxpayers will avoid a penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. 

An advisor can help

Implementing any of these strategies may impact your overall financial plan. The best way to find out how a strategy may affect your plan is to discuss ideas with a financial advisor familiar with your individual financial situation. They can review your specific situation, as well as recent changes in the tax law and how you can take advantage of them.

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