As the year comes to an end, many emotions accompany it. The holidays are often a time of great reflection and celebration for many, and perhaps no single day of the year more succinctly encompasses the whole spectrum of these emotions than New Year’s Eve. But another emotion that inevitably comes with the changing of the year is anxiety because the christening of 2025 means that tax season is nearly here once again.
For many, tax time is an arduous season at best. It can be highly stressful, from the sheer amount of paperwork and logistical planning that must be done to effectively file one’s taxes to the constant deluge of advertisements for tax assistance programs. That’s why it’s best to have your ducks all in a row and your paperwork properly prepared before the year’s end, setting yourself up for success in the months ahead.
Here are some crucial tax optimization strategies that every high-income earner would do well to acquaint themselves with.
Deductions
One of the simplest and most effective ways to maximize your tax opportunities this season is to prepare a well-documented inventory of all work-related expenditures you’ve made throughout the year so you can claim deductions. Traditionally, such deductions include specific expenses that are necessary for your work but that you weren’t compensated for by your employer, such as purchasing additional materials for an office.
According to Asset Preservation Wealth & Tax, “Deductions can reduce your taxable income overall. These include mortgage interest, certain medical expenses, or even charitable donations. Common tax credits include education credits or credits for energy-efficient home improvements.”
But recently, with the increase in popularity of remote work, there’s even more to consider. If you work from home, everything from your electricity bill to the purchase and upkeep of your home computer can be considered for deduction purposes.
Tax Credits
While deductions are meant to compensate individuals for expenditures made throughout the year, tax credits are meant to incentivize certain activities, lending an added boost to the tax liability of those who accomplish certain key feats. For example, one of the most common tax credits is the Child Tax Credit, which rewards people for having children. Another similarly focused example is the Adoption Tax Credit, which rewards individuals who adopt a child with a taxation credit.
Other examples of viable tax credits include the Mortgage Interest Credit and Lifetime Learning Credit. To this end, many of these tax credits are used to incentivize key traditional aspects of American life, rewarding those who comply and reach those benchmarks.
Charitable Trusts
Another key element that is especially potent for high-income individuals to consider is the potential optimizing benefits that charitable trusts can offer. By establishing a charitable trust that makes regular donations to a charity of your choice over a given period, you can receive further tax incentives. This is a win-win situation, as your charitable contributions will both help those in need and serve to benefit your own finances in the long run.
Welcoming the New Year Without Fear
John Lennon once sang, “A very Merry Christmas and a happy New Year, let’s hope it’s a good one, without any fear,” and rarely has that sentiment felt more potently relevant than it does heading into 2025. With so much of society changing in such fundamentally profound ways, the least you can do for yourself is to close out 2024 by preparing properly for the rapidly encroaching tax season. High-income earners should follow these critical steps to ensure they get the most out of their upcoming tax returns and set themselves up for success in 2025.