Year-End Tax Season Planning Preparation

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The end of the year is an opportune time to review your financial status and make strategic decisions that can impact your financial well-being in the coming year. Implementing certain financial moves before the year ends can potentially save you money, lower your current year tax bill and set a sound foundation for the future.

The end of the year is busy with holidays and family vacations — but it's also a time to review your finances and what you need to do, offset, claim, buy, or pay before deadlines pass. Here are several financial moves you should consider to help guide your decisions and align them with your financial strategies and goals.

Maximize Retirement Contributions

Contributing to retirement accounts, such as 401(k)s, IRAs, or Roth IRAs, before the year ends can bring several advantages. Firstly, it allows you to take advantage of tax-deferred or tax-free growth. Maxing out your contributions can reduce your taxable income for the year, potentially lowering your tax bill.

Moreover, funding these accounts to the maximum extent possible sets the stage for a more financially independent retirement. The power of compound interest means the earlier you invest, the more time your money could grow. Don't miss the opportunity to contribute as much as possible before the year concludes.

Review and Adjust Investment Portfolios

A thorough review of your investment portfolio is crucial as the year ends. Assess whether your investments are aligned with your financial goals and risk tolerance. Consider rebalancing your portfolio to maintain your desired asset allocation. Rebalancing involves selling some overperforming assets and reinvesting in underperforming ones to realign with your original strategy. This move not only mitigates risk but also positions your investments for potential growth in the upcoming year.

Fund a Health Savings Account (HSA)

A health savings account has numerous benefits such as tax advantages, long-term savings and portability. HSA contribution limits are currently $4,300 for single participants and $8,550 for families. Participants aged 55 and older can make an extra $1,000 contribution. Those interested in contributing generally have until the tax filing deadline to fund the account. To be eligible, a high-deductible health plan must have a deductible of at least $1,650 for individuals and $3,300 for families. Annual out-of-pocket expense maximums (deductibles, co-payments, and others) can't exceed $8,300 for self-only coverage and $16,600 for families. You can deduct your contributions to an HSA from your taxable income and the interest earned is tax-free. Distributions if used for qualified medical expenses are also tax-free.¹

Some of the long-term savings benefits include being able to roll over any unused funds from year to year. You can keep your HSA regardless of whether you change plans and you can save money on health plan premiums while having control over your investments.²

If you have to change jobs or retire, your HSA stays with you. You can use the money in your HSA to help pay for qualified medical expenses that Medicare doesn't cover.

Take Advantage of Your Flexible Spending Account (FSA)

An employee who decides to participate in an FSA is allowed to contribute up to $3,300 through payroll deductions during the 2025 plan year. These funds are not subject to federal income tax, Medicare tax, or Social Security tax. In some cases, an employer may also contribute to an employee's FSA. For FSAs that permit the carryover of unused amounts, the maximum carryover is $660, or employers can offer a 2.5-month grace period, but not both options. You will have to contact your plan sponsor or HR department to determine which method your employer offers.

This carryover won't impact the maximum amount of salary reduction contributions that can be made. Money left in an FSA at the end of the plan year, in excess of $660, will go back to the employer.

Review Insurance Coverage and Estate Planning

Evaluate your insurance policies, including health, life, and property insurance, to ensure they still meet your needs. Life changes and evolving circumstances may necessitate adjustments to coverage levels or beneficiaries. Additionally, review and update your estate planning documents, such as wills and trusts, to reflect any changes in your life or financial situation.

Taking the time to execute these financial moves before the year ends can significantly impact your financial health and potentially set the stage for a more prosperous future.

Consider consulting with a financial advisor to help you tailor these strategies to your specific circumstances and goals. By making these proactive financial decisions, you can pave the way for a more confident financial journey in the year ahead.

Reduce Capital Gains Taxes

Individual filers with a total taxable income of $48,350 or less won't have to pay any capital gains tax. If their income falls between $48,351 and $533,400, they may be subject to a 15 percent tax on capital gains. Above $533,400 the rate increases to 20 percent. If you decide to offset your capital gains liability by selling underperforming securities to generate a capital loss (also known as tax-loss harvesting), you are permitted to reduce your taxable income by up to $3,000 per year ($1,500 if filing as married filing separately). If your capital losses exceed that threshold, you can carry into the following year's tax season and beyond.³ Keep in mind that tax-loss harvesting can be applied to both short- and long-term gains and losses; however, distributions of short-term capital gains from mutual funds, for example, are treated as ordinary income for tax purposes. Unlike short-term capital gains that are generated from the sale of securities held directly, investors can't offset short-term capital gain distributions with capital losses.⁴

Take Required Minimum Distributions (RMDs)

Individuals that reached age 73 in 2024 must take their first RMD by April 1, 2025, and the second RMD by Dec. 31, 2025.⁵ If you fail to withdraw the minimum RMD amount by the deadline, you may be subject to a 25% penalty based on the amount that should have been withdrawn.⁶

Contribute to a 529 Plan

In 2025, an individual can contribute up to $19,000 per year to a 529 plan without it being subject to the federal gift tax, or $38,000 if married filing jointly. For those interested in making a larger contribution (or “superfunding”) they can give up to $95,000 (or $190,000 for married couples), in a single year without it counting toward the lifetime gift tax exemption, and it must be 5 years' worth of contributions. Those contributors or a single contributor can't give any more money to that recipient within a 5-year period. If they do, it will go against their lifetime gift tax exemption which is currently $13.99 million.⁷

Do You Have Questions? Talk to a Financial Advisor

Financial advisors at BECU Investment Services are here to help. Our team will take the time to get to know you, understand your goals, and help implement a tax strategy, an investment strategy, or an education savings plan that's appropriate for you. Click here to set up a complimentary consultation, or call 206-439-5720 today.