End of the Year Tax Planning Strategies

Welcome back to Topic Tuesday with Alan Dempsey and Juliana Jansen from Buffalo First Wealth Management. The holiday season is approaching, and the weather is changing in Buffalo, New York. We will discuss essential end-of-year tax planning strategies. Some tax actions must be completed by December 31. Others can be addressed by April 15. We will begin by reviewing the tax items that can be managed up until April 15. Then, we will cover those requiring action by December 31.

IRA/Roth IRA Contributions & Health Savings Accounts

Contributions to an IRA or Roth IRA for the prior year can be made until you file your taxes, or by April 15 at the latest. Inform your accountant about these contributions to ensure tax accuracy. Traditional IRA contributions may reduce your taxable income, depending on your income level. Roth IRA contributions are made with after-tax dollars and do not lower current taxable income. Both types of contributions must be reported to the IRS.

Health savings account (HSA) contributions for the previous tax year can also be made up until April 15. HSAs are available to individuals with a high-deductible health plan. Contribution limits vary based on filing status and age. Additional catch-up contributions are permitted for those over age 55. These contributions share the same April 15 deadline as IRA contributions.

For actions to take before December 31, consider tax loss harvesting—a strategy where you sell investments at a loss to offset realized gains for the year. If you have mutual funds, be sure to review end-of-year capital gain distributions, which typically occur in November or December, and note the ex-dividend date to determine when gains are applicable for tax purposes. Selling losses before year-end helps improve tax efficiency by balancing out realized gains.

As Alan mentioned, some individuals may find that converting a traditional IRA to a Roth IRA is appropriate. If a Roth conversion is the right choice, it must be completed by December 31 to qualify for tax treatment in the current year. Many people mistakenly believe that, like contributions, conversions can be made up until April. However, Roth conversions must be finalized by year-end.

Individuals over age 73 or those with an inherited IRA must take required minimum distributions (RMDs) by December 31 each year. Missing this deadline can significantly affect your tax situation. If you complete a Roth conversion, be sure to inform your tax preparer, as the confirmation forms (Form 5498) typically arrive in May.

Flex Spending Accounts

Many individuals have flexible spending accounts (FSAs). These accounts allow you to set aside funds for eligible health services or products. FSA funds typically must be spent by the end of the year, but some plans offer a grace period. It is important to check with your employer to confirm whether your plan allows this extension. When in doubt, assume funds must be used by year-end. In contrast, health savings account (HSA) balances do not need to be spent by year-end and can be rolled over annually. We often advise clients to use HSAs as a long-term tax planning tool for healthcare expenses in retirement. FSAs generally require funds to be spent down each year.

People often confuse FSAs and HSAs due to similar acronyms, but significant differences exist between these account types.

Clients should be aware that HSA funds do not need to be spent within a single year. HSAs can also be invested. This offers a long-term, tax-advantaged resource for future healthcare expenses. For many, they serve as an effective planning tool.

College Savings

Contributions to 529 college savings plans must be made by December 31 to count for the current tax year. State rules vary. Some states offer tax deductions for contributions to their own plans. Review your state’s eligibility requirements for deductions.

To qualify for a deduction, charitable contributions must be made by December 31. Complete donations before this date to ensure eligibility. This is another December 31 end-of-year tax tip.

Final Thoughts

In summary, these are some of the most common end-of-year tax planning strategies. Our team is available to offer guidance and support as needed. Many additional strategies exist; each situation may require individual consideration. We hope this overview helps you prepare for year-end. If you have topics of interest, please contact us so we can address them in a future video. Follow us on our YouTube channel, Buffalo First Wealth Management, LLC, and on our social media channels. Thank you for joining us for Topic Tuesday.