WSJ Your Money Briefing - Money Moves to Make Now to Reduce Next Year’s Tax Bill

Episode Date: November 1, 2024

Tax-filing season is still several months away. Wall Street Journal reporter Laura Saunders joins host J.R. Whalen to discuss money-saving adjustments taxpayers can make to their withholding levels and retirement accounts, plus tax credits to take advantage of, before the end of 2024.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

How do airplanes fly? What's in this box? What does this thing do? Kids are curious about everything, including guns. Learn how to store your gun securely and make your home safer at nfamilyfire.org. Brought to you by N Family Fire, Brady and the Ad Council. Here's your money briefing for Friday, November 1st. I'm JR Whalen for The Wall Street Journal. It might seem a little early to be talking about paying your taxes, but you can take steps now to cut your 2024 tax bill. If you want to make a charitable contribution and have a deduction for it, you need to make

it before December 31st. If you want to get certain kinds of energy credits, you have to make the investment before December 31st. December 31st is a big deadline for all kinds of energy credits, you have to make the investment before December 31st. December 31st is a big deadline for all kinds of things. Wall Street Journal tax reporter Laura Saunders will join us after the break. Some tax planning now could help keep more money in your pocket when it's time to file next year. Wall Street Journal reporter Laura Saunders joins me. Laura, it's not even Thanksgiving.

Why should people start thinking about their taxes? By the time people are thinking about their taxes next spring, it's going to be too late to do much at all. Now, you can put money into an IRA or Roth IRA next spring, and putting money into an IRA will cut your taxes. But a lot of the really important things have to be done before year end. The deadline is December 31st. You have to make changes before then. Oh, so it's not just due diligence and get ahead of the game. There's actually a deadline here. Yes, there is a deadline.

If you want to make a charitable contribution and have a deduction for it, you need to make it before December 31st. If you want to get certain kinds of energy credits, you have to make the investment before December 31st. December 31st is a big deadline for all kinds of things. I'm going to ask you about the energy credits in a moment. But the Federal Reserve began lowering interest rates recently and is expected to lower them further

before the end of the year. How could that factor into how much money people pay next year? They have lowered them a little, but not that much. And so when interest rates go up, the amount on tax underpayments goes up. A few years ago, that interest rate was only 3%. Now it's 8% on underpayments goes up. A few years ago, that interest rate was only 3%. Now it's 8% on underpayments. And that has cost people billions of dollars already. So people need to pay attention to their withholding if they're employees or to their quarterly

estimated tax payments if they're not employees. And so when they look at those numbers, how can they put them to work for them? You need to check them or use a calculator or talk to a CPA. There are online calculators from the various tax companies and you need to make sure that you're paying the 90% by the deadline. And also that if you've had quarterly payments

that you've paid the right amount in the right quarters because otherwise that can still bring you a penalty. What if your income was uneven or maybe you had a spike in income during the year? Oh, that's the most important thing of all. If that's gonna cause you to get outside these safe harbors, try to pay more to Uncle Sam to pay what you owe through changing your withholding.

Now, employees can do that with their paychecks and retirees can often do it with withholding. Now employees can do that with their paychecks and retirees can often do it with withholding on their IRA payouts and things like that. Why would you do that? The reason is that withholding can go all the way back to the beginning of the year and protect you from higher taxes on say a spike in income, a capital gain, a windfall, a bonus from work, things like that. So if you change your withholding, you won't have as much problem with underpayment of

taxes and interest charges on that. When the 2017 tax overhaul went into effect, it made sense for a lot of people to use the standard deduction when filing their taxes instead of itemizing. Is that still the case? So, what some people do is bunching. They take the standard deduction one year and they itemize the following year. And how they handle this is that, say they give a certain amount to their church every year, but they would make two contributions in one year so they can benefit from itemizing,

and then they make no contributions the following year, and they take the standard deduction then. And the big wild card is, will the 2017 tax overhaul be renewed in 2025? A lot depends on the election of the president and also of the houses of Congress. We just don't know what's going to happen with that yet, But Congress has a great big deadline coming up at the end of 2025. That's when a lot of important provisions lapse and they've got to figure out what's going to happen next. So let's talk about inherited retirement accounts. The rules changed in the past couple of years for people with IRAs that were passed down. Where do things stand now?

That's important too because a lot of people have inherited IRAs since the law changed in 2019 and it changed as of 2020 going forward. But it was very confusing about whether you had to take distributions from those inherited IRAs every year or whether you didn't. And the rules are complicated. I won't go into them. But for four years, you haven't had to take any distributions. Now the IRS has released rules about who has to and who doesn't have to. And people should look those up if they're not completely clear about their own situation.

Because people haven't been taking distributions, it might be that they're inclined to just take the minimum going forward, but that could leave you with a gigantic balloon payment in the last year that bumps you up one or more tax rates. So don't just think about always taking the minimum, think about taking the amount of money that will hold your tax rate lowest over several years. Earlier, you mentioned home energy tax credits. Those have become quite popular. They've become really, really popular, so popular that Treasury released a lot of data about them last year.

And people might want to take a look at whether they could help them. Now, there are two general categories of home energy credits. One is for really big ticket items, things like solar panels. And in 2023, taxpayers took over $6 billion worth of those credits. So they're finding them useful and you might too. A credit is better than a deduction. A deduction just reduces your taxable income, but a credit actually knocks that amount of money off your taxes. So if it's a thousand dollar tax credit,

you pay a thousand dollars less in tax. And for these big ticket items like solar panels, the average credit was about $6,000. Then there's another category for smaller ticket items, home insulation, energy efficient air conditioners, things like that. This year it's much easier to get those credits because next year they're still in the law, but the manufacturers are going to have to give each one of their items a number and you're going to have to put that number on your tax return for 2025. And so this year you don't have to go through that rigmarole. So it's

another reason to have a look. That's WSJ reporter Laura Saunders. And that's it for your Money Briefing. Tomorrow we'll have our weekly Markets Wrap-Up, What's News in Markets? And then we'll be back on Monday. This episode was produced by Zoe Kolkin. I'm your host, JR Whalen. Jessica Fenson and Michael O'Vall wrote our theme music. Our supervising producer is Melanie Roy. Aisha Al-Muslim is our development producer. Scott Salloway and Chris Zinsley are our deputy editors.

And Falana Patterson is The Wall Street Journal's head of news audio. Thanks for watching!