Year-End Tax Strategies: Navigate the "12 Tax Strategies of Taxmas" for Optimal Savings

This is Daniel, the founder of Bookkeeping for Painters.

And this is Richard, the advising director. How's it going, Daniel?

It's going well. It's starting to look a lot like Christmas. It is.

Yes. Halloween is over. And on November 1st, all the Christmas lights go up. At least that's how it's done in America right now.

Right. My son, we were driving by I think Target or somewhere, and there was like Christmas lights. He's like, there's Christmas lights already? We just had Halloween. I was like, good observation.

Yeah, yeah, if we didn't have Halloween, we'd probably see the lights maybe like end of August. So, um, it— I guess it could be worse, I don't know. Uh, but anyway, everyone's mind is, is thinking towards the holidays, um, And so we figured we'd take advantage of that. And you know, you get the 12 Days of Christmas, we've got the 12 Tax Strategies of Taxmas that we're going to talk about today. But basically 12 of my top tax strategies that you should at least consider or think about before the year ends. Because I really have to emphasize, it's like once the year is over, it is so, so difficult to go back retroactively and make, you know, tax planning moves. There's a few things you can do, but for the most part, your window is going to be up until December 31st. So these are all things to consider before the year ends, before that window closes, that will help you save money on your 2024 taxes. We got kind of a long list, so I guess we should probably jump into it.

Let's do it.

All right, awesome. So the first one is going to be for brand new baby businesses that have just come into existence, and that is get out of startup mode. Uh, what I mean by that is show some revenue, go do a job. I don't, I don't care if it's a big job or a little job, you just need some money coming in the door. And the reason for that is because starting up your business was expensive. Even before you got your first check from a customer, you had advertising and organization charges and bought equipment and vehicles and everything else. And until you start getting revenue in, those expenses have to be amortized and spread out over, over several years as startup expenses. And that's no good for you because you want to be able to write those off now. So in order to unlock those startup expenses, we just need to show a little bit of revenue. So knock on your neighbor's door and ask them if there's a wall you can paint for $100 if you have to. Maybe offer to hang his Christmas lights, but just get a little bit of revenue on the books. And now all those startup costs unlock and you'll be able to take those deductions in 2024.

Yeah, yeah. Hang his Christmas lights with all— with the ladders you just purchased for your startup costs.

Exactly. Let's get a little dirt on those ladders. Let's let— it's probably also a nice, like, psychological boost too. Like, hey, let's go out and make some money. Let's stop the planning phase and let's execute. All right. Number 2, dissolve or establish any needed LLCs by January 1st. So two sides of the coin here. If you have an LLC, you know that you are required to file a Beneficial Ownership Information Report with FinCEN by December 31st. If you don't know, you do now. Look into it. Reports are like most companies are way behind in doing this and there are penalties and fines for for, um, being late. So file your report. What if you have an LLC that you haven't used in a while? Maybe it was set up several years ago, there's no money in it, but it's still on the state's register. Well, we want to get it off. We want to officially dissolve that LLC with the state in which it was formed and also let the IRS know that this business is closed. And the reason for that is after January 1st, FinCEN is going to look at all the people who filed their BOI report and they're going to look at all the people on the state's records. And anyone who doesn't have a report is going to receive a nasty letter with penalties and fines. So don't let that be you. If you've got an LLC out there that you're not using, make sure you put it down, get rid of it. On the other side of the coin, if you are just starting your business, maybe you don't have an LLC formed yet. Get that LLC established before January 1st, because if the business grows in 2025 and you want to do an S corp election, you can do a late S corp election, but only if the LLC is already established. So LLCs are cheap unless you live in California, then they're about $800 a year. But go ahead and get that established. If you don't use it, if you don't use the S corp election, that's fine. You've got the LLC in your back pocket. You can pull it out and do the election whenever it's appropriate. But you don't want to get towards the end of the year, want to do an S corp election and then not have the entity in place because then you will have to wait until the following year. All right. Number 3, speaking of retroactive S corp elections, maybe now is the time to do it. Look at your profit and loss. Try to project how much you're going to earn this year. Try to understand what your reasonable salary would be and then run the numbers and see if it makes sense for you to do an S corp election. I've done about a dozen of these in the last couple of months, and it's amazing how much money folks are saving. By doing these elections. So you're not too late. You can get that in. Have a good CPA help you with that because there's a few hoops you got to jump through. Along that line, if you already have your S corp established, how is your payroll? Are you paying yourself too little or are you paying yourself, worse yet, too much? Remember, you know, every $1,000 of payroll is $150 of payroll taxes. So let's optimize your salary, make sure that you're paying yourself only the amount that you absolutely need to, and then you can make those adjustments as you go into 2025, paying yourself the exact right amount. I do this with my clients once a year. We, we do a new payroll recommendation and we dial it in and people are saving several thousand dollars every year in payroll taxes that they don't need to pay. So that's number 3. Number 4, have you held your board of advisor or board of directors meeting yet? Anyone who has an LLC should have a board of advisors. If you have a corporation or an LLC taxed as a corporation, you're going to have a board of directors. Different names, same concept. But we're going to want to have our board meeting before the end of the year. 3 reasons. One, we need advice from people that we know and trust. Number 2, we want to help legitimize our corporation and protect our corporate veil by holding a required board meeting with minutes each year. And number 3, we are going to be able to deduct any travel, meals, lodging, those type of expenses that are associated with our board meeting. So make sure that that is on your calendar before December 31st. If you wanted to combine your board meeting with maybe, um, a Thanksgiving dinner or a Christmas dinner, uh, you know, you might be able to take advantage of some, some tax deductions there. All right, number 5: pay your kids who are under age 18 from your business if they've been performing work in the business. So paying your kids is a great tax strategy. The federal standard deduction is $14,600 this year. That means they can earn that much from your business without paying any taxes on the federal level. If you live in a state with an income tax, your state standard deduction may be different. So just kind of look at that. You know, not most— not every state follows the Fed. So just kind of be aware of that. But pay your kids. They are in a 0% tax bracket. You're in a 22 to 32% tax bracket. It makes sense to transfer money to them and pay no tax. The key being you're paying them for work that they have performed that is reasonable for them in the business because we're, we're doing this above board. All right. Now that you've paid your kids, how about your spouse? Number 6, pay your spouse, but only if you need to fund an additional retirement account or if you need to write off medical expenses with an HRA. Those are the only two times I want to recommend putting your spouse on payroll unless they are— unless it's like a really important reason for them to be, you know, heavily involved in the business. But if you— if they want to come and work part-time and you're going to take their wages and put it into their own 401(k), that could be a good reason. Or if you have heavy medical expenses and you've gone through the work to set up a health reimbursement arrangement, it might make sense for your spouse to be an employee to take care of that— that— or take advantage of that benefit. I know I'm going fast. I'm only halfway through.

So just to be clear, you just don't like husbands and wives working together in their businesses. You don't want them— you would never recommend that they would work together?

Well, I'm trying to preserve marriages here. I'm like, I'm like the Dr. Phil of— no, if you and your wife or you and your husband are working together in the business, and you're both materially participating, then, then yes, you should, you should both be on payroll. What I mean by this is sometimes folks will come and say, hey, you know, it's, it's 99% my business. Should I bring my spouse in maybe part-time? And the answer is usually no, because when you pay your spouse wages, you're also paying payroll taxes. And I want to avoid FICA unless there is a good reason for them to be involved. Like, like you mentioned, Daniel, like they're an integral part of the business or so. So, you know, you just have to bite the bullet and pay the FICA because they're so heavily involved. Or maybe you want to fund their 401(k) from the business. And so you can get an extra $23,000 or $30,000 into a retirement account but you got to pay them to do that. So that could be a reason. And then I kind of glossed on this one, you know, the health reimbursement arrangement. If you have a lot of medical expenses, it can be very, very difficult to get tax deductions for those. Itemizing sucks. Like, we, you know, people talk about writing off medical expense. Schedule A itemizing is probably one of the worst ways to do it. So some people have set up a health reimbursement arrangement inside their business. Their spouse becomes an employee, and now the business can help contribute towards paying for those medical costs. But that's kind of a, kind of a deep dive there. I already mentioned 401(k), so number 7 is retirement strategies. I'm just going to give you my quick list of, of how we should be saving for retirement. Number 1, if you work for an employer who offers a match, you want to contribute to your employer's 401(k) up to the match. Take every dollar that they're willing to give you because that's free money. Once you get the full match, you're going to stop and you're going to put your retirement dollars in other places. That are more efficient. The second place you're going to go is your HSA, Health Savings Account. You have to have an HSA insurance plan and then you can open up an account where money goes in tax-free and you can use it to pay for medical expenses tax-free. That's double dipping. It's one of the only times you can do that legally. So once you get your employer match, I suggest maxing out your HSA at $8,300. for a family. After the HSA is maxed out, we're going to look at the Roth IRA. Roths are awesome because even though you don't get any tax break immediately, that money's going to grow and it's going to come out in retirement completely tax-free. It's a great benefit. So we want to max out our Roth. And then if that's not enough, we still have money we want to put away. That's when we're going to establish a 401(k) or simple IRA. For our company, and then we're going to max that out. So those would be my, my, um, hierarchy of retirement savings. Number 8, uh, deduct healthcare expenses. So if you work for a company that has a flexible spending account, they can put up to $3,200 in that account. It is use it or lose it. So now, if you've got that money, now's a great time to say, do I need to get do I need to have my, my teeth looked at? Do I need to have my eyes checked? Is the time to buy a new pair of glasses? You know, what medical procedures have I been putting off that I need to have done before the end of the year so I can have my FSA pay for it and not have to lose that money? Uh, after the FSA, we've got HSA, which we touched on. Make sure you're getting your full $8,300 into that because that money can come out tax-free. To pay for medical costs. Uh, if you've got serious medical expenses and it's more than that can be covered by an HSA, then we can look at maybe doing a health reimbursement account for your business. There is some complexity in getting that set up, but if you've got heavy medical costs for a family member who can also be an employee of the business, it's worth doing. And at the very least, if you are self-employed, make sure you're getting the self-employed health insurance deduction on your personal tax return. If you have an S corp, you're going to have to make sure your insurance premiums are reported on your W-2 in order to take advantage of that. All right. Number 9, we're rolling here. Buy new vehicle or equipment and place it in service before the end of the year. Now, I don't recommend buying anything that's not going to benefit your business, right? We don't spend a dollar to save $0.20 on taxes. But if you're going to be buying something anyway to help grow your business, if you can do it before December 31st, then we can write it off on 2024 tax return. We have 60% bonus depreciation still in 2024, and we've always got Section 179. If it's a vehicle that weighs under 6,000 pounds, we're going to bump up against some limits. It's about $20,400 is the max. But talk to your tax pro and kind of work that out. The key here is just getting it purchased and placed in service, which means you got to drive at least one business mile before the end of the year and then you unlock 2024. All right. Number 10, Roth conversions. This is kind of swimming in the deep end, but if you are looking at doing what's commonly known as a backdoor Roth, where you take a traditional IRA and you convert it into a Roth, those conversions do need to be done before December 31st. So if that's on your radar, you're probably already talking to your, your tax professional about that. Just make sure it happens before the end of the year. Number 11 is shift income and expenses. So if you've got jobs coming up in January, February, March, can you buy the materials and the supplies for those jobs in December and get the tax write-off in 2024? You know, you don't have to pay cash for them. You can put them on credit and pay the credit card off in 2025 as long as they were purchased in '24. The tax write-off is for 2024. Same thing with income. Maybe you wait until 2025 to collect on some jobs that you did, um, you know, around the holidays. Then you can recognize that income in 2025, push it off, kick the can down the road 12 months, um, and not have to pay the taxes right away. All right, finally, number 12, charitable contributions. During the holidays, there are plenty of places that would love to take your money. Just make sure that they are an official 501(c)(3) organization. Those are going to be your big nonprofits, Salvation Army, your churches, your educational institutions. Quick tip: GoFundMe campaigns for individuals are not nonprofits. So It's awesome that you're generous and just, you want to help folks. But if you donate to an individual that's not a nonprofit through GoFundMe, it doesn't turn it into a charitable contribution. Uh, you can donate cash, you can donate property. Appreciated property is a great way to handle this. Let's say you have a piece of property, uh, you paid $50,000 for, and now it's worth $100,000. And you want to sell it and donate $50,000 to your favorite charity. Don't sell the property, pay the taxes on the gain, and then donate the $50,000. Donate the appreciated property directly to the charity. Let them sell it and they don't have to pay taxes on it. So you've just increased your donation by whatever your, your tax bracket is, 24 or 32%. Whatever. Another thing folks do when they go to retire, if you've got a 401(k), IRA, and you hit 70 years old, you are required to take minimum distributions. You have to pay taxes on those distributions, but not if you donate them to a charity. So just make sure you donate the distributions first. Don't take them, pay the taxes, and then make the donation. Give it to the charity before you pay the taxes on it, and then your donation will be worth that much more. All right. That was 12. Thank you for sticking with me.

Great job. I couldn't have said it better.

Yeah, I know I ran through these super quick for time. If you've got questions about these, you want to dig deeper on any of them, you know, let us know. Join our Facebook group, ask questions there. These are the type of things I'm going to be discussing with my tax planning clients this year. And if you are a tax planning client and you heard something on here that piques your interest, please bring it up. We're having our winter tax planning meetings right now, and so we're going to be knocking out quite a few of these things from the list. Awesome.

All right. With that, we will see you next week.